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UNITED STATES OF AMERICA. 



RUDIMENTARY ECONOMICS 



FOR 



SCHOOLS AND COLLEGES. 



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GEORGE M^ STEELE, LL.D., 

PRINCIPAL OF WESLEY AN ACADEMY, WILBRAHAM, MASS., AND MEMBER OF 
THE AMERICAN ECONOMIC ASSOCIATION. 



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LEACH, SHEWELL, & SANBORN, 

BOSTON AND NEW YORK. 



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Copyright, 1890, 
By George M. Steele. 



C. J. PETERS & SON, 
Typographers and Electrotypers. 



Press of Berwick & Smith. 



TO THE 

^lumnt of tie Haiurmce mniijersits of TOt0con2m» 

AND ESPECIALLY 

TO THE GRADUATES OF THE YEARS 1874 TO 1879. 

WHO. WITH THE AUTHOR, 

PURSUED THE STUDY OF THE SCIENCE, THE RUDIMENTS OF 
WHICH ARE HEREIN SET FORTH, 

^fjts ILittle Uolume 

IS AFFECTIONATELY INSCRIBED. 



" Man, the molecule of society, is the subject of social science. . . . 
His greatest need is that of Association with his fellow-men." " As- 
sociation depends upon Individuality. There can be no association 
without differences." — Carey, 

" The higher a living being stands in the order of nature, the greater 
the difference between its parts, and between each part and the whole 
organism. The lower the organism, the less the difference between 
the parts, and between each part and the whole." — Goethe. 

" For the body is not one member, but many." " Many members, 
yet but one body." " Those members of the body which seem to be 
more feeble are necessary." " And whether one member suffer, all 
the members suffer with it ; or one member be honored, all the mem- 
bers rejoice with it." — Pauu 



PREFACE. 



This brief treatise is intended to meet the wants of 
students in academies and high schools. There is no 
dearth of works on Political Economy, but most of them 
are too abstruse and elaborate for young pupils, while 
many prepared for this class are condensations rather 
than simplifications of the subject. 

To present the principles of this study briefly and 
clearly, and at the same time exhibit satisfactorily through 
familiar illustrations their practical applications, is no 
easy task, yet this has been the aim of the author. His 
success can be tested only by experience. 

Another difficulty in the preparation of such a text- 
book lies in the fact that while at the present time a 
multitude of books on Political Economy have been 
written by able and reputable scholars, even on funda- 
mental principles there is so wide a diversity of opinions 
and so much antagonism. This is intensified by the par- 
tisanship displayed by advocates of different views, and 
still more because these antagonizing doctrines have 

V 



VI PREFACE. 

found their places in the platforms of political parties. 
It is eminently proper on questions that divide public 
thought both sides should have a fair hearing, in order 
that the immature student may understand the grounds 
of belief on which either party rests its faith. This, 
too, has been the purpose of the author. Questions 
just now agitating the public are freely brought forward 
with the main arguments sustaining the different doc- 
trines briefly, but it is hoped clearly, presented. 

Notwithstanding the great number of disputed points, 
there are many general principles with which it is 
important that even the young student should become 
acquainted. It is also of great value to know the con- 
flicting views of eminent thinkers both past and present. 

The author has drawn freely on the works of Henry 
C. Carey. On the labor and wages question he is 
specially indebted to President Francis A. Walker's able 
treatises. The late Professor Jevons has furnished val- 
uable aid on the Instrument of Exchange. Other writers 
have been cited as occasion has demanded. 

G. M. S. 

WiLBRAHAM, Mass., January, 1891. 



CONTENTS. 



INTRODUCTORY CHAPTER. 

DEFINITIONS AND PRELIMINARY STATEMENTS. 

1. Relation of Social Science to Political Economy. — 2. Wealth. 
— 3. Value : general notion. — 4. Chief element of value ; 
cost of production. — 5. Capital as pre-existent labor an ele- 
ment in value. Exertion and abstinence. — 6. Utility an es- 
sential characteristic of value. Definition. When more or 
less prominent. — 7. Utility not the measure of value. Some- 
times in an inverse ratio. Full definition of value. — 8. 
Further consideration of wealth. Full statement of its 
import. — 9. Man the proper subject of Political Economy, 
not mere material wealth. — 10. Economy, husbandry, not 
parsimony. Political Economy has reference to man in so- 
ciety. Association and individuality the great forces of civil- 
ized humanity. — 11. General divisions of the subject , . . 



PAGE 



BOOK .First. — Production. 



CHAPTER I. 

PRODUCTIVE AGENCIES. 

1. Production defined and illustrated. Two great agencies, 

nature and man. Man furnishes labor. Nature supplies 

(i) materials, (2) forces. — 2. Labor defined; consists in 

effecting changes 9 

vii 



Vili CONTENTS. 

CHAPTER II. 

APPLICATION OF LABOR TO PRODUCTION. 

PAGE 

1. Application of labor, direct and indirect. Direct labor of 
three kinds, — transformation, transmutation, and transpor- 
tation. — 2. Indirect application : more obvious. Five kinds : 

1. Preparation of material; 2. Manufacture of implements; 
3. Providing sustenance ; 4. Furnishing clothing, shelter, etc. ; 
5. Protecting the laborers. — 3. Among the less obvious 
forms of indirect labor are: i. Organizing, superintending, 
etc. ; 2. The rearing of children ; 3. Education ; 4. The pro- 
fessions; 5. Invention and discovery. — 4. Labor not the 
sole condition of wealth. Mind and character 14 

CHAPTER III. 

PRODUCTIVE AND UNPRODUCTIVE LABOR. 

1. Disagreement among writers. — 2. Several kinds of effort gen- 
erally allowed to be unproductive: i. Misdirected labor; 

2. That of which the ultimate object is destructive; 3. All 
purely speculative projects ; 4. That which is expended in 
ministering to vicious appetites ; 5. Discrimination between 
utilities, economics, and ethics 20 

CHAPTER IV. 

CAPITAL. 

1. Capital the fruit of abstinence, but not of abstinence alone. 
— 2. A capitalist not necessarily a rich man. Professor 
Bowen on the beginnings of capital. — 3. Relation of capi- 
tal to wealth. — 4. Wealth which is not capital. — 5. Fixed 
and circulating capital. — 6. Capital must be consumed. — 
7. Nearly all wealth the result of recent production. — 8. 
Change of circulating into fixed capital. — 9. Effect of the 
invention of labor-saving machinery .... ..... 23 

CHAPTER V. 

RELATIONS OF CAPITAL AND LABOR. 

1. Generally that of mutual dependence. — 2. Capital furnishes 
conditions of labor. Doctrine of the limitation of labor by 



CONTEJSTTS., ix 

'.- . . . ... PAGE 

capital subject to a variety of modifications. Still true in 
general that a small amount of capital employs a small 
amount of labor. — 3. Effect of unproductive expenditure 
of the rich on the welfare of the poor 31 

CHAPTER VI. 

SOME CONDITIONS OF HIGHEST PRODUCTION. 

1. Combination and division of labor. Association and indi- 
viduality. — 2. Combination of two kinds, simple and com- 
plex. — 3. Diverse processes in a single trade. Vast in- 
crease of productive power thus effected. — 4. Direct bene- 
fits of division of labor. — 5. Limitations to division of 
labor. — 6. Some disadvantages 34 

CHAPTER VII. 

CONDITIONS OF HIGHEST PRODUCTION, Continued. 

1. Diversification of industry. This diversification as far as 
possible in each community. — 2. Diverse tastes and apti- 
tudes to be met, otherwise much productive force lost. — 3. 
Freedom of labor and commerce. This freedom to be 
real, and not merely theoretical. The largest liberty always 
under some restrictions. — 4. General education, a great 
productive power. — 5. Moral character an important con- 
dition 42 



Book Second. — Consumption. 



CHAPTER I. 

NATURE AND VARIOUS FORMS OF CONSUMPTION. 

1. Production implies consumption; that is, the destruction of 
values. — 2. Re-appearance of the value destroyed, in other 
forms. — 3. Voluntary or involuntary . 49 



X CONTENTS. 

CHAPTER II. 

PRODUCTIVE AND UNPRODUCTIVE CONSUMPTION. 

PAGE 

1. The difference not always easy to determine. — 2. Much ob- 
viously unproductive. — 3. Necessaries, conveniences, and 
luxuries . 53 

CHAPTER III. 

PUBLIC CONSUMPTION. 

1. The support of government. — 2. Principles which should con-' 
trol in public expenditure. — 3. Expenditure for general edu- 
cation. — 4. Pauperism. — 5. War and national defence . . 57 



Book Third. — Exchange. 



CHAPTER I. 

PRINCIPLES WHICH FORM THE BASIS OF EXCHANGE. 

1. Definition and explanation. — 2. How related to association 
and individuality. — 3. Exchange between remote communi- 
ties. — 4. "Commerce" and "Trade." Obstacles to direct 
exchange 65 

CHAPTER II. 

THE LAW OF EXCHANGE. 

1. Value for Value. Reference to the nature of value. — 2. Con- 
ditions modifying the law. No general rise and fall of 
values. — 3. Supply and demand. Terms explained. The 
general principle as affecting value. — 4. Further limitation 
of these terms. — 5. How increase of supply by diminishing 
value increases demand. — 6. The principle modified in cases 
of limited production. — 7. The law still further modified 
by other circumstances 70 



CONTENTS. XX 



CHAPTER III. 

THE PROMOTION OF COMMERCE. 

PAGE 

1. Whatever tends to promote association aids commerce. — 2. 
Benefit of rapid and immediate exchange. — 3. Proximity of 
producer and consumer. Facilities of transportation. — 4. Va- 
riety of products 77 

CHAPTER IV. 

PROTECTION AND FREE TRADE. 

1. Design of a protective tariff. Free trade. — 2. Arguments in 
favor of protection: i. Defence against unequal competi- 
tion of older and richer societies ; 2. A steady and uniform 
market ; 3. Tends to societary completeness ; 4. Advantage 
to general interests other than those directly protected. 
Three advantages to agriculture; 5. Prevents degradation 
of labor 82 

CHAPTER V. 

ARGUMENTS IN FAVOR OF FREE TRADE. 

1. Positive arguments : i. Method of nature; 2. Conserves and 
increases the productive power of labor; 3. The right of 
property implies freedom of exchange ; 4. All restriction on 
commerce between two nations injures the interests of both; 
5. Freedom of commercial intercourse tends to peace and 
good-will between nations. — 2. Objections to the protective 
system : i . Violates the right of every man to do what he 
will with his own ; 2 Protective duties of the nature of a tax 
upon all other industries; 3. Diminishes exports; 4. Infant 
industries protected never come to maturity ; 5. If good be- 
tween nations, why not between different parts of the same 
nation, as in the United States? 6. Gives monopoly priv- 
ileges. — 3. Comparative strength of arguments on both sides. 
Argument from fear of degradation of labor. — 4. Force of 
argument from success of free trade between parts of a large 
nation. — 5. Free trade as the " method of nature." — 6. Ex- 
amination of the objection that protective duties are of the 



Xll CONTENTS. 

PAGE 

nature of a tax. — 7. Do protective duties cause diminution 

of exports ? — 8. Brief summary of results 90 

CHAPTER VI. 

THE INSTRUMENT OF EXCHANGE. 

1. Money the means of enhancing the facility of association. — 
2. Original exchange by barter. Its inconveniences. Trade 
a partial remedy 103 

CHAPTER VII. 

THE PRECIOUS METALS. 

1. Eight characteristics desirable in any substance used as a me- 
dium of exchange. These found to a considerable extent in 
gold and silver, though not all of them to the full extent 
sometimes claimed. — 2. Why these metals are used for this 
purpose. Coinage. — 3. Relation of government to money. 
Legal tender. — 4. Monetary standard. — 5. Relative value 
of gold and silver 105 

CHAPTER VIII. 

CERTAIN DOCTRINES CONCERNING MONEY EXAMINED. 

1. Money not synonymous with wealth. — 2. Value of money in 
circulation only a small fraction of that of the commodities 
exchanged. — 3. Relation of the amount of money to gen- 
eral prices 112 

CHAPTER IX. 

THE CREDIT ELEMENT IN THE INSTRUMENT OF 
EXCHANGE. 

1. Money only a minor proportion of the machinery of exchange. 
— 2. Early suggestion of credit. Book account. Transfer 
of credit. — 3. Definition of credit. — 4. Advantages of cred- 
it : I. To capitalists; 2. To non-capitalists. — 5. What is 
loaned frequently, not money, but other capital reckoned as 
money 117 



CONTENTS. XUl 

CHAPTER X. 

BANKS AND BANKING. 



PAGE 



122 



1. Nature and history of banks.— 2. Origin of banks. Banks 
of deposit. — 3. Banks in relation to credit. — 4. Abridg- 
ment of the use of money by bank-checks and drafts. — 5. 
The clearing-house. — 6. How coinmodities pay for com- 
modities through the facilities afforded to credit by means 
of banks. — 7. Four kinds, or functions, of banks. Savings 
banks described. Their advantages. — 8. Banks of discount 
and loan. — 9. Banks of issue or circulation. — 10. Banks 
deal not so much in money as in debits and credits. 
Small proportion of money used in large banking-transac- 
tions • 

CHAPTER XI. 

PAPER CURRENCY OF THE UNITED STATES. 

1. National -bank system. — 2. Government notes, or "green- 
backs."— 3. Advantages and disadvantages of a paper cur- 
rency 

CHAPTER XII. 

^ TRUSTS. 

1. Development, meaning, and primary objects of the trust.— 2. 
Production on a large and on a small scale. — 3. Suppression 
of excessive competition, and thus of cost of production. — 
4. Limitation of production. — 5. Fixing of arbitrary prices. 
— 6. Advantages inuring to the benefit of stockholders rather 
than the public — 7, Competition and self-interest as mutual 
checks.- 8. Measures to correct the evil of trust?.— 9. 
Trunk-line railroad combinations not of the nature of trusts, 138 



133 



Book Fourth. — Distribution. 



CHAPTER I. 

GENERAL STATEMENT. 
1. Definition and illustration. — 2. Difiiculty of determining the 
just proportions of product to each producer. — 3. General 



XIV CONTENTS. 

PAGH 

division of subject: i. Wages; 2. Profit; 3. Interest; 4. 
Rent; 5. Taxes . 139 

CHAPTER II. 

wages: general view. 

1. Limitation of term. Wages, salary, fees, etc. — 2. Theory 
of a laboring-class. "Wages-fund." — 3. Objections to the 
phrase, '* laboring-class." — 4. Minimum rate of wages . , . 144 

CHAPTER III. 

WAGES AS AFFECTED BY VARIOUS CIRCUMSTANCES. 

1. Nominal and real wages. — 2. Conditions to be taken note of 
in estimating real value of wages. — 3. Wages also affected 
by character of the labor. — 4. Influence of the industrial 
system of a community as affecting wages 147 

CHAPTER IV. 

HIGH AND LOW WAGES AS RELATED TO DEAR AND 
CHEAP LABOR. 

1. Labor dear or cheap according as there is a larger or smaller 
amount of product for a given amount of wages. — 2. Theory 
of necessary rate of wages as affecting prospect of improve- 
ment in condition of laborers. E. P. Smith's views . . , .150 

CHAPTER V. 

"THE WAGES-FUND." 

1. If the theory is correct, no improvement for the laborer except 
in the restriction of the population. — 2. Relation of wages 
to product. — 3. F. A. Walker's views. Wages not paid out 
of capital, but out of product 153 

CHAPTER VI. 

CAREY'S LAW OF THE INCREASE OF WAGES. 

1. As society advances, there is an increase of the laborers', and 
a decrease of the capitalists', proportion of the joint product 
of labor and capital; while there is to both an increased 
amount. — 2. Illustration from the beginnings of capital 



CONTENTS. XV 



with the savage. — 3. Axe of stone, of bronze, of iron, of 
steel. — 4. Corroborated by facts • • • ^S^ 

CHAPTER VII. 

REMEDIES FOR LOW WAGES. 

I. Possibility of remedies. — 2. Can Government do any thing ? 
What it cannot and what it can do. — 3. "Strikes." Good 
and evil of them. — 4. "Trades-unions." Two objects of 
these. Economical and uneconomical measures. — 5. Co- 
operative association. Its methods. — 6. Difficulties in the 
way of it. Importance of the office of an employer. — 7. 
Copartnership of industry. Its method and advantages. 
Harmony with principles previously laid down. — 8. The 
wages of women. — 9. Immigration as affecting wages . . . i6o 

CHAPTER VIII. 

PROFITS. 

1, Portion of product going to the employer. The latter not 
necessarily a capitalist. — 2. Economy of conceding to an 
employer a larger proportion of the product than to a 
common or even a skilled laborer. — 3. The risk and un- 
certainty of business an element to be considered in calcu- 
lating the claim of profits. Profits not in conflict with 
wages. — 4. Patent and copy rights. Their significance and 
economy ^7° 

CHAPTER IX. 

INTEREST. 

1 Extent of its signification. — 2. Rate of interest, on what it 
depends: i. Amount of money in circulation; 2. Profits of 
business ; 3. Scarcity or uncertainty of capital ; 4. Facility 
of re-conversion of evidences of debt i74 

CHAPTER X. 

RENT. 

1. Rent in this country as compared with the same in Europe. 
Relation to the value of land. — 2. Importance of land. — 3. 



XVI CONTENTS. 



What constitutes value in land? Doctrines of the British 
economists. H. C. Carey's views. — 4. Ricardo's theory of 
rent. — 5. Consequences of the theory. — 6. Influences which 
retard the operations of the law. — 7. The theory compared 
with facts of history. — 8. The fallacy in the theory. The 
most productive soils not first occupied. — 9. True theory 
of value of land. The same as the value of other things. 
— 10. Rent or value of land affected by various minor 
considerations: i. Fertility; 2. Facility of cultivation; 3. 
Situation , 178 

CHAPTER XL 

SOCIALISM. 

1. Not necessarily revolutionary or anarchic. — 2. Defined and 
explained. — 3. Its aim. Extreme views. — 4. Different views 
of Socialists concerning distribution. Difficulties. — 5. The 
ideal society, a condition precedent. — 6. 7, Obstacles in the 
way of Socialism. — 8. Its present impracticability. Tenden- 
cies towards Socialism ig^ 

CHAPTER XII. 

TAXATION. 

1. Under the principle of division of labor, there must be some 
agency for the protection of the laborer. Government and 
its relation to production. — 2. Economy of taxation. — 3. 
Whether taxation should be according to property or rev- 
enue. — 4. Uniformity of taxation practically impossible 
and uneconomical. — 5. Direct and indirect taxation. — 6. 
Comparative merits of the two methods. — 7. Forms of 
direct taxation : i. Income-tax ; 2. Assessment of total 
property. Faults of any system yet devised. — 8. Other 
methods proposed. — 9. Henry George's single tax theory . 188 



Political Economy. 



INTRODUCTORY CHAPTER. 

DEFINITIONS AND PRELIMINARY STATEMENTS. 

1. Social Science treats of the natural laws which govern 
men in their relations to each other. Political economy is 
the application of that portion of these laws which pertain 
to the production and distribution of wealth. 

2. It is important to understand what is meant by wealth. 
Writers differ greatly concerning its definition ; but they all 
agree, by implication at least, in making value an essential 
characteristic of the objects symbolized by this term. It 
will, then, be necessary, before going on to a final determina- 
tion of the signification of wealth, to ascertain the meaning 
of value. 

3. As this is, in some respects, the most important word 
in political economy, it is desirable to get a clear apprehen- 
sion of what it implies. Value is a relative term, having 
reference to the quantity of one commodity which may be 
equitably exchanged for a given quantity of another. Thus 
a bushel of wheat may be given for two bushels of oats, 
or a cord of wood for twenty yards of cotton cloth. But, 



2 POLITICAL ECONOMY, 

in every instance of relationship, there must be some ground 
of the relation. The determination of this is essential to an 
adequate definition. 

4. The chief element in the value of any thing, and that 
which constitutes its original standard, is the cost of its pro- 
duction ; and by cost, we mean the labor involved. Labor 
may be defined as the voluntary effort put forth by man to 
secure some desired object. But when we say that value is 
estimated by the amount of labor necessary to produce an 
article, some care is required lest the statement mislead. It 
is not the amount of labor actually expended in the produc- 
tion which measures the value. A yard of cotton cloth made 
a hundred years ago involved the labor, perhaps, of several 
days ; but its value, if now in the market, would be less than 
that of the same commodity of the present day, which in- 
volves the labor of not a tenth part as much time. It is, 
then, the labor which would be required to reproduce or 
replace an article, which determines its value. 

5. But when we speak of labor as the principal ground of 
the relation which we denominate value, it is not labor in 
the form of immediate exertion alone that is meant. A 
large part of the labor which creates value is implied in the 
existence of tools and implements, and other contrivances. 
These constitute capital. This has sometimes been called 
" pre-existent labor." It will be sufficient for our present 
purpose to define it as the result of previous labor, employed 
in fu rther production . 

The design of all labor is to secure objects for the grati- 
fication of desire. Now, this gratification may be imme- 
diate, or it may be postponed for the sake of some greater 
gratification. In other words, the objects secured by labor 
may be consumed at once, or they may be wholly or partly 
reserved for use in securing other objects. All that is thus 



DEFINITIONS. 3 

reserved is of the nature of capital. It is the result of labor ; 
but the point to be observed is, that its existence is due, not 
to labor alone, but to abstinence as well. We thus arrive at 
a modified form of our statement concerning value ; namely, 
that it is estimated by the amount of sacrifice involved in 
the production of a commodity ; and that this sacrifice is 
of two kinds, — exertion and abstinence. 

6. But there is another essential characteristic of value, 
which involves a further modification of our definition ; this 
is utility. It has sometimes been confounded with value, 
and some writers speak of it as value in use. But it is 
clearly a distinct element. It may be defined as comprising 
all those qualities in objects which make them desirable. It 
will be readily seen that there are some things which have 
the greatest utility, and at the same time have little or no 
value : they are such objects as cost nothing ; that is, such 
as involve no labor in their production. Thus air and sun- 
shine, and, to a great extent, water, ordinarily cost nothing ; 
and yet they are of the highest utility. It is often the case, 
that the utility of articles is almost inversely as their value. 
Iron is of very small value as compared with gold, and gold 
is of equally small utility as compared with iron. That utility 
is essential to value, is evident from the fact that no one 
would make any sacrifice for an object which would gratify 
no desire. Yet the prominence of this element in the de- 
termination of value varies widely : sometimes it is para- 
mount, at other times its influence is so feeble as to be 
scarcely perceptible. When a man buys a barrel of flour, 
he expects, under ordinary circumstances, to pay a price 
somewhere nearly corresponding to the cost of its production. 
The utility, though maintaining an essential influence, is not 
palpably considered. But suppose some extraordinary con- 
ditions, by means of which there is not more than flour 



4 POLITICAL ECONOMY. 

enough in the market to supply one-third of the demand, 
and that no more can be had for several weeks, or perhaps 
months. Those who have plenty of means will offer prices 
which are far out of proportion to the cost of production, 
and which will be measured almost wholly by the intensity 
of desire for the article. A man of means will pay several 
times the natural value of the commodity, rather than let 
his family suffer. It is obvious, that, in such a case, utility ^ 
and not labor, becomes the paramount element in the de- 
termination of value. 

7. But it is, after all, doubtful if utility is a radical element 
in the measurement of value. It unquestionably has much 
to do in its temporary modification, through various disturb- 
ing influences operating upon the market. But it can hardly 
be regarded as in any proper sense a standard by which to 
estimate value. 

Value and utiUty are often found in the inverse ratio of 
each other ; that is, as value increases, utility diminishes, and 
vice versa. But it is not correct to say that this is always 
the case. If it were, infinitude of value would imply zero 
of utihty. But, as we have seen, an object destitute of 
utility can have no value. Mr. Carey's description of the 
two is, that " the utility of things is the measure of man's 
power over nature ; " while value is- " the measure of nature's 
power over man," or of " the resistance which nature makes 
to man." These statements, while not altogether adequate 
as definitions, imply profound philosophical truths. 

This, then, I would present as a proper and final definition 
of value : Mart's estimate of the amount of sacrifice requisite 
to the attai7i7nent of a desired object. 

8. We may now return to the subject of wealth. If we 
regard wealth as comprising all things that have value, we 
shall not be far out of the way. But at this point we meet a 



DEFINITIONS. 5 

conflict of opinions among economists. Many, and perhaps 
a majority, of writers limit the term to material things. 
They make no account, in this respect, of those mental and 
moral acquisitions which constitute so large a proportion of 
the means of enjoyment and prosperity to humanity. The 
maker of a violin is in possession of an article which is to 
him a portion of wealth. But the skill and talent of Paga- 
nini, or Ole Bull, or any inferior musician who can so use 
the instrument as to gratify the popular taste, are not, on 
that account, reckoned by these writers as of any value in 
an economical sense ; nor do these abilities constitute any 
part of the wealth of the community. Yet without this 
competence residing in some person, the violin could have 
no value. The same may be said concerning the abilities of 
various other classes who have acquired power to minister to 
the gratification of human desires. These are conditioned 
on labor, just as any kind of wealth is ; and their utilities 
are not only just as real as those of material objects, but 
they are vastly more extensive. Without them, there would 
be no wealth worthy the name. 

These considerations lead to the following definition : 
Wealth comprises all those useful things and qualities, the 
attainment of which involves sacrifice on the part of man. As 
value implies a certain degree of resistance to man on the 
part of nature, so wealth implies in man a certain degree 
of power over nature. Hence Mr. Carey's statement, that 
wealth is " the power to command the always gratuitous 
services of nature." When man is at his weakest, socially 
or individually, nature does little for him. Every infant, 
if dependent on nature alone, would inevitably perish. In 
the infancy of society, it is only by the most strenuous exer- 
tion that a precarious subsistence is secured. But, with every 
increment of power in man, nature multipHes her services. 



6 POLITICAL ECONOMY, 

They are not bought, but freely given, and given as soon as 
man is able to command them. In the most advanced civ- 
ilization, the forces of nature have become so subservient to 
man, that, in thousands of cases, one can accomplish what a 
score, or sometimes even a hundred, could not formerly have 
done. It is this increase of power, more than that of ma- 
terial commodities, which constitutes the real wealth of the 
world. 

9. It is easy to see, from what has already been said, that 
the proper subject of political economy is man. The laws 
pertaining to the underlying science are found in the character 
of man, — his tastes, his desires, the motives influencing him, 
and the limitations to which he is subject. The results ar- 
rived at are, his happiness and prosperity, his freedom, and 
his mastery over nature. This view differs from that enter- 
tained by many writers. With them it is regarded as the 
science of material wealth, and man is treated only as an 
important incident. Yet social science, of which poHtical 
economy is a branch, if it exists at all, is a science of man, 
and not of his accidents or appurtenances. 

10. The word economy is from a Greek compound, and 
is nearly equivalent to our Saxon word husbandry. It has 
reference to the prudent management, by a householder, of 
his means, so as to secure the largest possible advantage for 
himself and his family. It is hardly necessary to remark, 
that economy is not the same as parsimony or frugality. It 
does not consist in mere abstinence for the sake of saving. 
It is rather a wise use of means and forces, so as to make 
them productive of the largest desired results. 

Political economy, as the name implies, has reference to 
man in society, and not as an individual. One of man's 
greatest needs — perhaps his very greatest — is that of asso- 
ciation. The solitary individual is only a minute constituent 



DEFINITIONS. ^ 

of man, in man's relation to the great purposes of life. 
Separated from his fellows, he would be, even in his indi- 
vidual capacity, but a small fraction of what he is when 
associated with them. No man is complete in himself. 
Each individual must be supplemented by others, generally 
by many others, and find a large part of his own compe- 
tence in this association. Each has something that another 
lacks, and we are made to be sources of mutual supply to 
our several wants. 

But not only is association essential to man, but individu- 
ality is equally essential. A superficial thinker might regard 
these two characteristics as antagonistic. The fact is so 
far otherwise, that each of them is actually dependent on 
the other. No man would associate with another unless the 
one had something which the other wanted. But for this, 
there would be no commerce. Two hatters making the 
same kind of hats would neither of them have any thing 
which the other would want. Men of the same mental habits 
and requirements could not benefit one another. Men must 
differ, or they will not associate ; and the greater the differ- 
ence, the greater the association. 

On the other hand, it is only by association that the indi- 
vidual advances, and the highest development takes place. 
By such advaneement and development, and by such only, 
the differences among men become great and numerous. 
In the lower grades of humanity, there is comparatively little 
difference between individuals ; and there, too, the associa- 
tion is very slight. It is only in an advanced civilization 
that a strongly marked individuality exists, and that there 
are those numerous differences which make the mutual 
dependence the greatest. 

11. Having given this brief general view of the subject, 
and defined some of its principal terms, we may now pro- 



8 POLITICAL ECONOMY. 

ceed with an examination of the principles involved in it. 
The subject is divided into four great branches, as fol- 
lows : — 

I. Production, which treats of the creation of wealth. 
II. Consumption, which treats of the destruction of 
wealth, and the laws which govern it. 

III. Exchange, which comprises the forms of commerce, 
or the transfer of commodities between different parties. 

IV. Distribution, which has reference to the apportion- 
ment of wealth among the parties who produce it. 



BOOK FIRST. 



PRODUCTION. 



CHAPTER I. 

PRODUCTIVE AGENCIES. 

1. Production consists in rendering the utilities of nature 
available to man. Some of these are furnished spontane- 
ously, or without human effort. Others require only slight 
exertion. But generally, though the resources of nature are 
inexhaustible, and readily offer themselves under the proper 
conditions, these conditions must be furnished in the form 
of man's labor. 

There are two great agencies which must co-operate in 
production,— nature and man, Man furnishes labor. This 
includes not only muscular exertion, but all the mental 
effort — the study, care, and anxiety — involved in securing 
objects of desire. Nature furnishes all the material upon 
which labor is to be exerted, and all the forces without 
which it would be ineffectual. 

I. Nature supphes materials. In the simplest and most 
rudimentary style of human living, the desires of men are 
few, and easily satisfied. Fruits and nuts may be had for 
the gathering. Wild animals may furnish meat. There are 
caves and hollow trees which serve for shelter. Still some 
effort is requisite to secure the sustenance, and to render 
the shelter tenable. The animals must be hunted and slain, 
and their flesh prepared, although it be in the rudest manner. 
Fruits must be gathered, and the caves and cavities shaped 



12 POLITICAL ECONOMY. 

and in some way adapted. As society is developed, and as 
improvements are made, there will be additional desires 
prompting to additional exertions ; and the material to which 
these are to be applied will be forthcoming in the forms of 
wood, minerals, the skins of beasts and their coverings, the 
soils of the earth and those things which spring out of them. 
These comprise an almost endless variety of materials to 
which industry may be applied. 

2. But nature furnishes not only materials, but 2\?,o forces, 
to aid man in his productive efforts. The more obvious 
and palpable of these are gravitation, wind, explosive agen- 
cies ; the expansive power of steam, magnetism, electricity, 
and the forces of vegetation. There are also numerous 
passive powers or properties of matter, which, when adopted 
by man, give him untold advantage. Such are the mechanical 
powers of the lever, inclined plane, and pulley, and those 
qualities of the metals which render them capable of taking 
an edge for cutting-purposes, as also malleability, ductility, 
and elasticity. 

2. Labor has been defined as the voluntary effort put 
forth by man to secure objects of desire. We have seen 
that nature furnishes the material upon which labor is to be 
exerted, and the efficient forces through which production is 
effected. These materials and forces are supplied gratui- 
tously. ■ Nature is not parsimonious in this respect. The 
more we avail ourselves of her help, the more ready she is 
to help us ; and the greater the advantage we get over her, 
the more lavishly she bestows her gifts upon us. 

Labor, then, consists not in creating things, but in moving 
them; that is, in effecting changes. It directs the natural 
forces to the service of man, and it is in this that produc- 
tion chiefly consists. It can move materials and objects 
into positions where these forces can act upon them with 



PRODUCTIVE AGENCIES. 1 3 

the desired effect. Thus an agricultural laborer can effect 
such changes in the soil as are requisite to the growth of 
corn, and he can place the seed in the ground ; but he can- 
not make the crop. It is as impossible for him to create a 
kernel of grain as to make a planet. Labor may move fuel 
to the fire-place, and may properly dispose it for ignition ; 
it may move a match, which by a previous motion has 
caught fire, to the prepared fuel : but the kindling flame, 
the heat and its effects in cooking food or transforming 
water into steam, are the results of energies and properties 
which man could never invent. It is nevertheless true, that, 
without the agency of labor by which the changes are made, 
none of these effects would follow. Nature does ten thou- 
sand things without the co-operation of man. She even 
furnishes innumerable utilities ; but by herself she is not a 
producer, she creates no value. 



CHAPTER II. 

APPLICATION OF LABOR TO PRODUCTION. 

1. The application of labor to production is of two kinds, 
direct and indirecL The direct changes effected by labor 
may be embraced under the three heads of trans?nutatio7i, 
transformation, and tra7isportation ; or, a change of ele- 
ments, a change of form, and a change of place. They are 
also spoken of as chemical, mechanical, and commercial 
changes. The first finds its most common examples in agri- 
culture. The seed is put in certain relations to the soil ; and 
thus are furnished conditions of marvellous changes in the 
elements, drawn from both the earth and the atmosphere. 
But this kind of change is not limited to agriculture. It is 
exemplified in the rendering of ores, and the manufacture 
of soap, butter, cheese, etc. 

Changes in form are seen in the mechanical arts. Leather 
is transformed into shoes, cloth into garments, and lumber 
into houses and cabinet-ware. 

Changes in place are seen when a commodity is produced 
in one locaHty, and desired in another where it cannot be 
produced. Coal is found in the mountains of Pennsylvania^ 
and carried to New York, Boston, and hundreds of other 
places where it is needed. 

2. The indirect application of labor to production has 
far more importance than is popularly attached to it. A 



APPLJCATION OF LABOR TO PRODUCTION. 1 5 

little reflection will convince us that the direct effort put 
forth in effecting changes is only a small fraction of the 
whole labor involved. In indicating the several distinct 
forms of indirect labor, we may make a general division into 
the more obvious and the less obvious. 
The more obvious. 

1. In a large majority of instances, the material from 
which a commodity is to be produced by direct labor must 
be previously prepared. In the building of a house, a few 
carpenters, masons, and other artisans are employed. But 
the lumber, timber, bricks, stone, nails, paint, paper, etc., 
have to be furnished to these workmen by other producers ; 
and the material out of which the latter prepare some of 
these has to be provided by laborers still back of them. 
Nature, it is true, furnishes all the original material ; but it 
must often pass through several processes before it is fit for 
its final uses. 

2. Another form of the indirect application of labor is 
seen in the manufacture of implements which the direct 
laborer uses. The farmer must have ploughs, cultivators, 
carts, etc. ; each of the makers of these must also have 
tools to work with : and so on, back to the simplest forms 
of handicraft. 

3. For the workers in any occupation, sustenance must be 
provided. Hence those who produce the food upon which 
the direct laborers subsist are indirectly helping in the crea- 
tion of the value resulting. 

4. Another form of indirect labor is the preparation of 
shelter, clothing, and fuel for the direct workers. Under this 
head, too, is to be reckoned the erection of buildings for any 
m.anufacturing or mechanical business. These are essential 
to every such enterprise, and the labor involved is to be 
considered in estimating the value of the final product. 



1 6 POLITICAL ECONOMY. 

5. The protection of the laborers, their implements, mate- 
rials, and products, is also an item in the indirect applica- 
tion of labor. It is necessary to have agents selected by 
society, to guard against fraud, violence, and intimidation. 
They are a condition of profitable exertion, and their services 
are to be reckoned among the costs of all production. 

3. The less obvious forms of indirect labor. 

The foregoing comprise most of the more obvious forms 
of the indirect application of labor to production. There are 
other, not so conspicuous yet very important, ways in which 
labor more remotely, but still actually, contributes to this end. 
To some of these less obvious forms of indirect labor, I now 
call attention. 

1. There is the work of organizing, superintending, and 
managing a business enterprise. Every one knows how much 
depends, even in small undertakings, on wise calculations, 
careful plans, and judicious oversight ; and how, for want 
of these, there has often been a vast expenditure of labor to 
very little profit. Hence the organizers and managers of 
enterprises are to be reckoned as contributors to the 
product. 

2. All the labor comprised in the raising of children, who 
are themselves to become laborers, is to be reckoned here. 
This demands the expenditure of much effort on the part 
of parents and others. Were their labor to be wanting, the 
productive force of the world would soon cease. 

3. The labor involved in education is also clearly subsidi- 
ary to production. In this is embraced all that adds to the 
power and efficiency of the individual man. The labor may 
be that of the teacher or of the pupil, of instruction or of 
learning. Some of the most important vocations require no 
small amount of mental training in those who follow them. It 
is true, these are comparatively few : but all of the industries 



APPLICATION OF LABOR TO PRODUCTION. 1/ 

require more or less intelligence ; and the more of this any 
worker has, other things being equal, the greater will be his 
productive efficiency. Certainly there is no calling in which 
ignorance is an advantage : an idiot would not do for even 
a hod-carrier. 

4. In the class of indirectly productive labor is comprised 
that of the so-called professions. Physicians, by their knowl- 
edge and skill, preserve the health which would otherwise 
become impaired, or restore that already impaired, and thus 
furnish laboring ability to the community, which would not 
exist but for their agency. The lawyer puts forth productive 
power in another way : if a laborer has a legal question 
which it would require days, and perhaps weeks, for him to 
investigate and determine, but which a lawyer who has pre- 
pared himself by previous discipline and experience can 
determine in a few hours, at a cost to the laborer of only 
a quarter of the labor which he might have otherwise vainly 
spent, is there not here a clear and undeniable gain to the 
productive force of the community ? 

The clergyman furnishes none of the commodities which 
are commonly reckoned as constituting wealth ; but if, through 
his ministries, diligence, temperance, frugality, and integrity 
are promoted, and indolence, sensuality, and dishonesty are 
diminished, he certainly furnishes conditions of a larger 
productiveness than would otherwise exist; and thus his 
labor is, in a marked though indirect way, applied to pro- 
duction. 

5. Into this category come also inventors and discoverers. 
Among the latter we include the men of science, who, by 
their investigations, bring to light new forces and agencies, 
or new combinations of those which nature furnishes in aid 
of human labor. The former are those whose skill enables 
them to apply these in the various devices and contrivances 



1 8 POLITICAL ECONOMY. 

which constitute the efficiency of machinery. The marvel- 
lously multiplied resources accruing to humanity by these 
means are familiar to the most ordinary intelligence. 

These are some of the chief ways in which human exer- 
tion, though not very obviously related to production, does 
not the less actually enhance it to a manifold extent. There 
are also others, which there is no need to enumerate. 

4. It is perhaps worth our while, at this point, to notice 
an error to which a certain class of writers have given 
encouragement. They have taught us that wealth is the 
creation of labor alone. The impression is made, whether 
intentional or not, that this labor is solely physical exertion. 
Demagogues have seized upon this notion, and have instilled 
into the minds of uneducated workingmen that the latter 
have created all the wealth comprised in massive buildings, 
in bridges and aqueducts, in great ships and ocean steam- 
ers, in railroads and canals, in complicated machinery and 
costly wares. This doctrine would be safe enough if it were 
true. But it is not true, and is therefore unwholesome and 
pernicious. Certainly the things spoken of could not have 
existed without physical toil ; but, just as certainly, physical 
toil alone could never have produced more than an insig- 
nificant fraction of them. Of incalculably greater impor- 
tance have been the mental qualities called into requisition. 
It is also further to be considered, — and the consideration 
is more important than any yet named, — that character is, 
after all, the most potent condition of wealth. A great part 
of the error to which I here allude consists in putting the 
ethical aspects of the question out of sight. But these can- 
not be ignored without vitiating the whole discussion. Upon 
the moral character of a society, more than upon all other 
things, depends its productive and especially its accumu- 
lative power. No qualities are so essential to the existence 



APPLICATION OF LABOR TO PRODUCTION. I9 

of wealth as industry, frugality, and self-denial. There will 
be little wealth in a community where fraud, injustice, and 
sensuality are the ruling characteristics. This makes an 
important proposition, previously announced, more evident ; 
namely, that man is the proper subject of political economy. 



CHAPTER in. 

PRODUCTIVE AND UNPRODUCTIVE LABOR. 

1. There is no very general agreement as to what consti- 
tutes the difference between productive and unproductive 
labor. Some deny that there is any such thing as unpro- 
ductive labor : others restrict productive labor to that which 
results in material wealth. According to the latter, Daniel 
Webster, Horace Greeley, and Professor Agassiz were not 
producers, but the men who made their shoes and furnished 
their provisions were. Still other writers enlarge the sphere 
of productive laborers by reckoning as such all who indirectly 
contribute to production. 

If we accept the definitions previously given of labor, 
production, and value ; and if we admit, even without ac- 
cepting it as a definition, that " wealth is the power which 
man has to command the gratuitous services of nature," — 
then we shall be obliged to admit, that not only all the vari- 
ous classes of laborers to which reference is made in the 
last chapter, but that all who labor in any art the design of 
which is to gratify any legitimate desire of man, are produc- 
tive laborers. For, this capability of gratifying desire is an 
essential condition of wealth ; and when furnished by any 
kind of effort, whether the product takes on a permanent 
form awaiting future consumption, or is consumed at the 
instant of production, it is all the same ; for nothing can be 

30 



PRODUCTIVE AND UNPRODUCTIVE LABOR. 21 

regarded as a product which is not destined to be, sooner or 
later, consumed. 

2. Notwithstanding these strictures on the doctrine which 
makes so many and important kinds of effort unproductive, 
there are still numerous instances of unproductive labor. 
The following are the most prominent of these : — 

1. Misdirected labor, or that which does not secure the 
object at which it aims. If a man should devote months of 
time to the construction of a machine of which the mechani- 
cal principle on which it depends is impossible, his labor is, 
of course, ineffective. 

2. All of that labor the ultimate object of which is destruc- 
tion. Such almost wholly is war. It is admitted that wars 
may be waged to prevent a greater destruction than that 
involved in their prosecution. But, whatever may be the 
design of any war at the beginning, it must be acknowledged, 
that the destruction of wealth has been incalculably greater 
than the conservation or creation of it. Evidently most of 
the energy expended in war is unproductive. Here, too, 
must be reckoned the labor implied in maintaining vast 
standing armies. Could all this labor be turned into produc- 
tive channels, it would incalculably augment the resources of 
the civilized world. 

3. All purely speculative projects. By these I mean all 
such buying and selling as involve no increase of wealth to 
any one except by the same amount of diminution to others ; 
in other words, where all that is gained by one party is ne- 
cessarily lost by another. All trade which does not furnish 
some utiUty to society, not otherwise possessed, is unpro- 
ductive. 

4. Finally, we may rank here all labor expended in minis- 
' tering to any desire the gratification of which will diminish 

the productive power of its subject, or of any under his 



22 POLITICAL ECONOMY. 

control. Such would include the manufacture of, and traffic 
in, intoxicating beverages. And by beverages here is meant 
only what the word implies. It does not include such 
alcoholic commodities as are used in the arts, or for 
mechanical or medicinal purposes. Nor is this the only 
business which has this character, though doubtless it has 
it more obviously and conspicuously than any other. All 
the labor of furnishing a depraved literature to the perver- 
sion and enervation of the mind, and every system of effort 
by which is stimulated or gratified any passion or procliv- 
ity that diminishes man's power over himself, and so over 
the means which nature freely furnishes to all who are 
competent to command them, are of this kind. 

5. The statement in the previous paragraph respecting 
intoxicating beverages possibly needs some modification. 
It may be plausibly objected that these commodities come 
within the limits of the definition of wealth, that is, that 
they possess utility in the sense of power to gratify desire, 
and that their attainment involves sacrifice ; and hence, 
since the labor which produced them results in wealth, it 
must be productive labor. This, doubtless, is true so far 
as the first effect is concerned. But productive labor, in 
the broad, economical sense of the expression, must ulti- 
mate in the increase of the wealth of the community : 
labor which does not do this is not productive labor. 
Now, I suppose that it will be admitted by nearly every one 
that the labor expended in the manufacture of intoxicat- 
ing beverages does not result in the ultimate increase of 
the wealth of the community, but the contrary. It is 
therefore unproductive labor. 

We find ourselves here, too, on the border line between 
economics and ethics, where thinkers are apt to get into 
confusion. For instance. Dr. Chapin tells us that every 



PRODUCTIVE AND UNPRODUCTIVE LABOR. 23 

man has a right to do what he will with his own, and that 
the protective system violates this right, and is therefore 
to be condemned. This may be all true, but it is an 
ethical, and not an economical, argument. It is true that 
many measures may be economical and ethical at the same 
time, but economics and ethics should be kept clearly dis- 
tinct in our reasoning on these subjects. It is furthermore 
undoubtedly true that most things that are immoral are at 
the same time uneconomical. I am inclined to think that 
no really immoral measure is in the long run economical. 



CHAPTER IV. 

CAPITAL. 

1. We have already seen that capital is essential to any 
considerable production. We have also seen that capital is 
the result of previous labor reserved to aid in future produc- 
tion. We have further learned that capital implies saving. 
But mere saving is not the sole condition of capital ; indeed, 
a narrow penuriousness prevents the rapid accumulation of 
capital. The man who is accustomed to bring his water from 
a spring a quarter of a mile from his house, instead of dig- 
ging a well at the cost of a few dollars or a few days' work, 
acts uneconomically. In the long-run, the bringing of the 
water from the spring costs him much more than the digging 
of the well. The man who has extensive grain-fields, and 
who, for the sake of saving the expense of a reaper or even 
a cradle, continues to use the sickle, will find that his saving 
results in a loss instead of a gain. 

2. A man does not need to be rich in order to be a capi- 
talist. When the savage has invented a bow and arrows, he 
has the rudiments of capital. The laborer who has reserved 
out of his earnings enough to buy him a set of tools, or a 
few acres of land, is as really a capitahst as the owner of 
factories and railroads. It is only as foresight discerns the 
valuable consequences of self-denial, that there arises a suffi- 
cient inducement to reserve from present consumption for 

24 



CAPITAL. 25 

future use. " The hardest lesson for children and savages 
to learn is that of economy, — the necessity of bridhng the 
inclination or appetite of the moment, with a view to some 
prospective benefit. Long and hard experience has taught 
this lesson to the full-grown and reflecting man, and taught 
it so effectually, that, as is often the case, the acquired incli- 
nation overrides the original impulses ; and all other passions 
are merged not merely in the love of accumulation, but in 
that of saving." ^ 

3. Capital is not synonymous with wealth. It is only that 
portion of wealth which is employed in producing wealth. 
We need a little caution here, however, lest we be misled. 
There is a large amount of property which is not apparently 
or instantly productive, but which is unquestionably to be 
reckoned as capital. It furnishes certain conditions of pro- 
duction, inasmuch as, if it did not exist in its relation to the 
given enterprise, the latter could not go on. A farmer must 
have a considerable stock of provisions which he reserves 
from one harvest for his subsistence till another. These 
may lie a great part of the year inactive and apparently 
useless in his storehouses. But they are nevertheless a part 
of his capital, and without them his business must fail. The 
same is true of the fund which the manufacturer reserves 
with which to pay his workmen. It is the means of their 
subsistence between the time of their beginning work and 
the time when the completed product put in the market 
brings in its returns. 

4. The difference between wealth and capital may be fur- 
ther illustrated. A man has a hundred thousand dollars. 
He decides to invest in a manufacturing enterprise. He 
expends a portion of it in buildings and their appurtenances 
adapted to his object. He reserves a sufficient amount for 

* Professor Bowen. 



26 POLITICAL ECONOMY. 

the sustenance of laborers, which will be in the form of 
money to be paid out as wages ; also a certain amount to be 
used in the purchase of raw material. He must also make 
provision for food, clothing, and shelter, to keep himself in 
a condition to do his own work till the time of returns from 
the products of the business. All this might properly be 
reckoned as capital. But the amount embraced in the last 
item must be strictly limited to the purposes designated ; 
namely, to enable the proprietor to do the work essential to 
his business : otherwise it is not capital. If he does none 
of the work, but leaves the management to others, then the 
amount expended in food, clothing, and shelter is not capi- 
tal at all. Or, if he be engaged in the business, all that he 
expends beyond what is essential to the purposes specified 
is so much outside of his capital. Thus he may put twenty 
thousand dollars into a house, grounds, gardens, conservato- 
ries, costly furniture, and works of art ; but most of this is 
so much subtracted from his capital. It may be all properly 
and wisely used, but it is not used as a condition of further 
production. 

5. Capital is divided into fixed and circulating. There 
are two distinct ways in which capital is applied to produc- 
tion. The main difference consists in this, that certain kinds 
of capital are used only once in the fulfilment of their pur- 
poses ; certain other kinds are used repeatedly. There are 
also some minor differences. 

Circulating capital is of two kinds, i. There are the 
stock and commodities of any character to be consumed in 
reproduction. These embrace {a) the material out of 
which the new product is to come, — as lumber for cabinet- 
ware, leather for shoes, and cloth for garments ; {b) food 
and other provisions for the sustenance of laborers. 2. 
There is the stock of comnleted commodities on hand and 



CAPITAL. 2J 

ready for the market. The chairs that are finished and 
ready for sale in the factory are of this character. It is to 
be observed, that the same article may be at one time circu- 
lating, and at another time fixed, capital. Thus the chairs 
just spoken of, while they are in the hands of the maker, or 
passing through the hands of the wholesale or retail dealer, 
are circulating capital. It is only when they become fixed 
in use that their character changes. 

Fixed capital consists : i . Of all tools, machinery, and 
implements used in any industry ; under this head, too, 
are comprised all beasts of burden or draught, and all struc- 
tures of every sort for manufacturing and productive pur- 
poses. 2. All improvements of land, such as clearing, 
draining, fencing, etc. 3. Mental acquisitions gained by 
labor, and which give man power for productive results. 

6. It must be borne in mind, that there can be no pro- 
duction without consumption. All capital is consumed. 
This is readily seen in the case of circulating capital, but 
not so readily in that of fixed. Yet evidently tools, build- 
ings, bridges, locomotives-, and all other structures and in- 
struments wear out. The only difference is, that in one case 
the consumption takes place at once ; in the other, it is 
gradual. Some kinds of fixed capital are consumed more 
rapidly than others. The farmer's scythes, hoes, and hand- 
rakes rarely last more than a year or two. His carts, wag- 
ons, reapers, etc., last much longer. The steel pen with 
which I write these lines has been in use two days, and 
has now nearly exhausted its capability of service. The 
inkstand before me has served for nearly a dozen years. 
Some bridges and other structures have been in existence 
for centuries. The old Roman aqueducts are still seen 
stretching away for miles over the Campagna. Most of 
them, it is true, are in ruins ; but the many yet remain- 



28 POLITICAL ECONOMY. 

ing massive arches upholding the water-courses show how 
enduring are some of the products of human industry. 

7. It is an interesting fact, and worthy of notice here, 
that nearly all the wealth now in existence has been created 
within a comparatively recent period, and most of it within 
a few years. We talk of property inherited from ancestors, 
as if it had been received from them in its present form. 
Many persons have the impression that no portion of the 
wealth of the community has been produced within the past 
year, except so much as may have been added to that pre- 
viously existing. This is a great mistake. Says Mr. Mill, 
"The greater part in value of the wealth now existing in 
England has been produced within the last twelve months." 
This is stating the case pretty strongly, but it is not so far 
out of the way as one who has not investigated the subject 
might suppose. It is nearly certain that only a small pro- 
portion of the wealth now existing in England or in this 
country had any existence ten years ago. Capital is per- 
petuated, not by preservation in its present forms, but by 
continued reproduction.' 

8. It will readily be seen that all fixed capital must have 
previously existed in the form of circulating capital, and 
that the former only results from the conversion of the 
latter. Thus, in the primitive condition of society, when the 
savage has secured a certain amount of food, he may con- 
sume that food at once, or he may reserve a certain portion 
of it till he has an accumulated store, on which he may then 
live while he takes time to construct an improved club, or a 
bow and arrows. In the latter case he has converted his 



* The whole value of the industrial product of the United States for 1870 was 
estimated at $7,286,629,328. The whole value of all the properly of the country was 
reputed by the same authority as a little more than $30,000,000,000. Thus the annual 
product was nearly one-fourth as much as the entire wealth. 



CAPITAL. 29 

means of sustenance, which was circulating capital, into fixed 
capital. By this means he has acquired additional power 
over nature, and can accumulate more rapidly than before. 
As he can now more easily supply his wants, he will, if the 
spirit of sacrifice be sufficiently strong, be able to contrive 
and invent other instruments which will always be the means 
of additional advantage in his contest with nature. It is 
this constant conversion of circulating into fixed capital, 
that marks the progress of man from barbarism to civiliza- 
tion, and the gradual predominance of mind over matter. 

9. So far we see, in the case of a single individual and 
in the rudimentary condition of society, only good resulting 
from this change from the temporary into the permanent 
forms of wealth. This would seem to indicate a general 
law, that, in proportion as the tendency of property to take 
on permanent forms increases, the tendency to the growth 
of wealth increases ; or, that capital increases with the ten- 
dency to the conversion of circulating into fixed capital. 

Yet the opinion widely prevails among the uneducated or 
partially educated portion of the community, and even to 
some extent among the better informed, that, as machin- 
ery is invented, more and more laborers will be thrown 
out of employment, and thus deprived of their means of 
support. There are many circumstances about the intro- 
duction of machinery, which, to a superficial observer, in- 
dicate such a consequence. Thus, on a certain large farm, 
twenty men have been necessary to do the harvesting. 
Now the proprietor purchases a reaper. With two horses 
and two or three men, as much can be accomplished as 
before with the whole twenty. Consequently seventeen 
or eighteen men are deprived of employment. In some 
instances of sudden and rapid invention and change, this 
would undoubtedly be the case. But these changes 



30 POLITICAL ECONOMY. 

usually come on gradually. There is always a demand 
for a part of the displaced labor, in the construction of 
the machines. By reason of the increased facilities, there 
will be a larger production at the same cost. This will 
diminish the price, and greatly enlarge the demand, to satisfy 
which more laborers will be needed. There will also be a 
more rapid increase of capital, thus furnishing still addi- 
tional opportunities for labor. The ultimate and not very 
remote result is, that more laborers are required than before 
the displacement, and that, too, at better wages ; while, by 
means of the ever- increasing facilities, the cost of the means 
of living is diminished. 

The inventions of Arkwright and Hargreaves, when they 
were first adopted, so alarmed and exasperated the poor 
spinners of the neighborhood, who looked upon them as 
portending starvation to themselves and their families, that 
they resorted to violence, and tore down the machinery, and 
drove away the inventors. Yet, I suppose, within the life- 
time of these very workmen, and through the influence of 
these very machines, the demand for labor in the cotton- 
manufacture was more than doubled ; while, for a great part 
of the time since, probably fifty times as many hands have 
been employed as previously. The increase of labor-saving 
machinery within the present century has been almost incal- 
culable ; yet wages have been almost constantly increasmg, 
while such commodities as are desired by the laborers are 
constantly diminishing in value. 

But while in general the conversion of circulating into 
fixed capital is not detrimental, but on the contrary advan- 
tageous to the laborer, there are exceptions. This conver- 
sion may take place at times and under conditions which 
render it an evil instead of a benefit. Instances of this are 
seen in the building of railroads through regions where there 



CAPITAL. 



31 



is no demand for them, or the multiplying of houses in a 
village or city where the increase of population does not 
warrant it. But these are mistakes which, while they do 
much mischief temporarily, yet quickly correct themselves 
from the very nature of the case. 



CHAPTER V. 

RELATIONS OF CAPITAL AND LABOR. 

1. The relation of capital and labor is, in general, that of 
mutual dependence. Capital can produce nothing without 
labor. Labor works at an immense disadvantage without 
capital. Doubtless the precedence must be given to labor, 
since it must have created the first capital, and is therefore 
competent to eifect some rude production without capital. 
But each is essential to any considerable effectiveness of the 
other, and there is no real antagonism between them. The 
conflict of capitalists and laborers, so often manifested, arises 
out of the selfishness and ignorance of the human agents, 
and not out of the nature of things. 

2. Labor is limited by capital. This is a fundamental 
proposition, but subject to various modifications. We have 
seen that capital of itself produces nothing. It only fur- 
nishes the conditions of successful labor. The capital upon 
which labor depends consists substantially of {a) the ma- 
terial to be wrought into other forms, {b) real estate, {c) 
machinery and implements, and {d) the sustenance of the 
workmen. 

The proposition that labor is limited by capital is some- 
times interpreted to mean, that, in any community with a 
given amount of capital, any increase of laborers must dimin- 
ish the rate of wages, and that any increase of the rate must 

32 



RELATIONS OF CAPITAL AND LABOR. 33 

diminish the number of laborers employed. This interpre- 
tation presumes that all the capital of the community is em- 
ployed in the most profitable manner, and that the labor 
applied to it is disposed according to the best methods. 
But these are conditions seldom hkely to co-exist, even if 
they exist separately. 

Still it remains true in general, that, when there is a small 
amount of capital, only a small amount of labor can be 
advantageously employed. On the other hand, the more 
capital there is, other things being equal, the greater will be 
the demand for labor, and the greater its remuneration. 

3. Does the unproductive expenditure of the rich tend to 
the benefit of the poor by creating a demand for labor? 
This question has been much discussed, and even yet it is 
not with all minds clearly settled. Doubtless it does not 
admit of a categorical answer. The opinion that a profuse 
and extravagant consumption of wealth is beneficial to the 
community at large, can hardly be held without qualification 
by any person. Let us carefully consider the subject in 
several of its bearings. 

Here is a man whose income is ^20,000 a year. We will 
suppose that he consumes all this unproductively. He em- 
ploys a large retinue of servants, he buys costly delicacies for 
his table, procures splendid furniture and expensive garments, 
and gives magnificent entertainments. All this expenditure 
may be for services rendered, — for the work of servants, the 
products of artisans and artists. It makes a demand for a 
large amount and a great variety of labor. But nearly all 
the product of all this labor is consumed within the year : 
nothing is reserved. It is true, if this is a permanent income, 
and this is our hypothesis, the same number of laborers, but 
no more, can be employed for the next and the subsequent 
years. 



34 POLITICAL ECONOMY. 

Now, suppose, that, instead of expending the whole ^20,000, 
the proprietor had Hved on ^5,000. There would then have 
been ^15,000 to add to the permanent capital of the com- 
munity. This invested in business would have given em- 
ployment to as many laborers as though it had been used in 
the other way. At the end of one year it may have little 
perceptible effect on the demand for labor ; but, during the 
second year, this ^15,000 reserved from the first year's in- 
come will be still in existence. There will be also the profit 
accruing from the investment. Instead of being wholly de- 
stroyed, as in the other case, it will now furnish opportunity 
for at least a few more laborers. If the proprietor con- 
tinues to live on ^5,000, and to employ the remainder of his 
income productively, there will be more than ;^30,ooo to 
co-operate with labor, instead of the ^20,000, as in the first 
instance. The next year this additional business-capital will 
exceed ^45,000, and will soon go up to $60,000 and $100,- 
000. Not only will there be a constantly increasing amount 
of capital, but, by the increase of production, commodities 
will be cheapened ; and thus there will be a tendency both 
to an increase of wages and an enlargement of their purchas- 
ing power. Economy and not prodigality, on the part of the 
rich, is an advantage to the laborer. 
4 



CHAPTER VI. 

SOME CONDITIONS OF HIGHEST PRODUCTION. 

1. It is only by the application of principles underlying 
political economy, that we come to the conditions of the 
highest production, or, in other words, find how to satisfy 
the largest range of desires, to the greatest extent, at the 
smallest cost of labor. 

One great essential to this end is the combination and 
division of labor. It may seem strange that two apparently 
contradictory terms should represent entirely harmonious 
conceptions. But we shall see this to be actually the case. 

We need at this point to recall what has already been said 
on the subject of Association and IndividtiaUty. We are 
made to be mutually dependent. From the cradle to the 
grave, most of our wants are supplied by others than our- 
selves. A full complement of human qualities is found 
only in the aggregate of humanity. Every one lacks some- 
thing that some other can supply. 

But in order to association, as we have seen, there must 
be difference. Two persons just alike would have no need 
of each other. Mutual dependence is in the inverse ratio 
of similarity. If one man be blind but otherwise physically 
sound, and another have good eyes but no legs, the blind 
man can carry the legless one on his shoulders ; while the 
latter directs the former's course, and warns him of any 

35 



36 POLITICAL ECONOMY. 

danger or obstacle in the way. Two legless men would be 
of little use to each other, and " if the blind lead the blind, 
both shall fall into the ditch." 

Association and individuality are the two characterizing 
forces of an advancing civilization. They are analogous to 
the centripetal and centrifugal forces in the physical world. 
Men combine to produce a certain result, because each can 
contribute something which another cannot so well or so 
readily. Hence combination is not only consistent with 
division of labor, but it is largely dependent upon it. 

2. Combination or co-operation is of two kinds, — simple 
and complex. The former is illustrated in those instances 
in which several persons unite for the accompHshment of a 
result which could not be effected by separate workers ex- 
cept in much more than the proportionate time. There are 
also operations which can be performed by the combination 
of a number of persons, which one man could not effect in 
any length of time : such are the moving and placing of 
heavy timbers and stones, the management of ships and rail- 
way-trains, and many other such things. 

Complex combination is where several persons help each 
other by following different employments. Each man needs 
nearly the same that every other man needs. But, while 
each provides for only one kind of want, he provides more 
than enough to satisfy his own desires in that particular re- 
spect, and contributes the overplus to meet that same want 
in others. As all others do the same, each is contributing 
to meet the desires of one, and all to each. The shoe- 
maker, the tailor, the carpenter, the cabinet-maker, the 
blacksmith, the paper-maker, the tinman, the miner, the 
painter, etc., are all contributing to supply the farmer's 
needs ; and the farmer is as indispensable to the needs of 
all of them. The remarkable thmg about it is, that most 



CONDITIONS OF HIGHEST PRODUCTION. 37 

of these persons are working without any previous concert or 
mutual understanding, and are thus unconsciously co-oper- 
ating for each other's advantage. The wants of each are 
many times more fully met in this way, than if each should 
undertake to supply all his own wants ; since each can work 
to the best advantage if he confine himself to the few kinds 
of work for which he has taste and aptitude. 

It is just here that we see the immense civilizing influ- 
ence of this separation and co-operation in labor. Were 
every man compelled to produce for himself whatever he 
needs, it is evident that his provision for his needs would 
be meagre, and hardly obtained. The obstacles to acquisi- 
tion would be so numerous, that, were he to put forth the 
most strenuous efforts, only a small part of what he might 
desire could be secured. No one would have any induce- 
ment to obtain much beyond the bare necessaries of life. 
There would be the scantiest accumulations, no capital 
worthy the name, and consequently no public works, scarcely 
any commerce, little culture, no art, science, or literature, — 
in a word, no civilization. 

3. We have, so far, chiefly considered the separation of 
labor into different industries, each of which ministers to 
great numbers of the followers of other occupations. But, 
as civilization advances, the separation is carried further. 
In complicated trades the work is divided into a number of 
processes. The increase of the productive power of labor 
by this means is almost marvellous. The example of pin- 
making has been used as an illustration of this ever since 
Adam Smith. Formerly there were in this occupation eigh- 
teen distinct parts. An instance is given where only ten per- 
sons were employed, some of them performing two or three 
operations. With ordinary exertions they could make twelve 
pounds of pins in a day, or about forty-eight thousand pins 



38 POLITICAL ECONOMY. 

of average size. Each person, then, on an average, might 
be regarded as making forty- eight hundred in a day. But 
we are assured by those competent to judge, that if all had 
wrought separately, and none been educated to a particular 
process, they probably could not have made twenty pins 
apiece. This gives an increase, through combination and 
division, of two hundred and forty fold. Mr. Say gives an 
illustration from the manufacture of playing-cards, where the 
increase was two hundred and fifty-eight fold by the same 
method. This seems almost incredible, and yet there are so 
many other illustrations that there can be no doubt on the 
subject. 

4. Among the benefits of the division of labor are the 
following: i. The increase of dexterity in the workman. 
Persons of the commonest abihty gain astonishing facility in 
a little time by concentrating upon one kind of action. A 
child fastening on the heads of pins, it is said, will repeat 
an operation requiring several distinct motions of the mus- 
cles, one hundred times a minute for several successive 
hours. Adam Smith states, that, if a blacksmith had to make 
nails without having been accustomed to the work, he would 
not make more than two or three hundred bad nails in a 
day. But boys who are brought up to that special work 
can turn out twenty-three hundred good nails in a day. 

2. There is a saving of time and material, {a) In pass- 
ing from one kind of work to another, much time is ordi- 
narily lost. Neither the mind nor the muscles are ready for 
the new labor, and there is always more or less sauntering 
before getting adjusted to the changed conditions. It is 
true, however, that there is something of an offset in the 
fact, that, in such a change, a rest is afforded to one set of 
muscles while another set is called into action, {b) Time 
is saved, again, in learning the business. To master a com- 



CONDITIONS OF HIGHEST PRODUCTION. 39 

plicated trade might require, say, five years ; but if the vari- 
ous processes be grouped in five divisions, and each of five 
men learn one of these in a year, and each devote himself 
to that which he learns, then twenty years of time will be 
saved in learning that trade by these five men. {c) There 
is also saving of material. In learning a trade, much mate- 
rial is commonly spoiled. If the diversity of operation be 
great, the waste will be proportionally great. This would 
be greater where each learns a whole trade than where only 
a single process is learned. 

3. Another advantage is, that inventions to abbreviate or 
save labor in a particular department are more likely to occur 
to one whose attention is exclusively directed to that work. 

4. A fourth advantage is so conspicuous and obvious that 
it is remarkable, that, instead of being the first noticed, it 
was not observed till among the last. It is that of classify- 
ing the laborers according to their capability. Different 
parts of a trade often require unequal degrees of skill and 
physical strength. By allowing those who have the least of 
these, to do the simpler and lighter parts of the work, the 
more complex, nicer, and heavier can be given to those more 
competent. The latter would not only do more work than 
if they ranged through the whole business, but they will do 
a portion which the former could not do at all, and would 
thus be unavailable as laborers. This exclusion of a large 
proportion of laborers would make the work much more 
costly. Take again the illustration of pin-making. Mr. 
Babbage has shown that some portions of this work require 
very considerable skill. Other portions can be performed by 
persons of ordinary ability, and in them young boys and 
girls often accomplish as much as experienced and skilled 
workmen. An instance is given where the wages ranged 
from six shillings a day down to four and one-half pence. 



40 POLITICAL ECONOMY. 

Now, if all these operations were to be performed by each 
laborer, only the six-shilling workmen could be employed, 
as they alone could do certain parts of the work. All the 
others would be shut out, the best workmen would get lower 
wages, and the cost of the product would be enhanced from 
five to ten fold. 

5. There is also the advantage which comes from the 
multiplication of services. The express-companies, devoting 
themselves to the carrying of parcels and packages of goods, 
can carry a hundred or a thousand of these with many times 
less labor than all who have goods to send would have to 
expend did each carry his own. 

6. The multiplication of copies, as is done by a printing- 
press, or in founderies, or by means of dies, is another ex- 
ample. To copy out by hand a thousand copies of the 
Bible or of Shakspeare, would cost five hundred or a thou- 
sand times as much as to have them printed where several 
copies are struck off from the same type. 

5. But there are certain limitations to the divisions of 
labor. I. One of these is the nature of the employment. 
Some occupations admit of only a certain number of divis- 
ions. In watch-making, it is said, there are more than a 
hundred distinct branches : in some other trades, only three 
or four are possible. Others still, while capable of manifold 
division, are such that the different kinds of work must be 
done at different seasons of the year, so that, if one made a 
speciality of any of these, he would needs be idle a good 
part of the time : of this kind is agriculture. 

2. A second limitation is found in the demand for the 
product. A blacksmith setting up his forge in a sparsely 
settled neighborhood, the patronage of which will furnish 
occupation for only one man, must do all the different parts 
of the work himself. If the community increases, he may 



CONDITIONS OF HIGHEST PRODUCTION 4 1 

employ an apprentice ; and continued growth may furnish 
occasion for a journeyman, and perhaps more than one, and 
the divisions take place accordingly. 

3. Another limitation is in the amount of capital em- 
ployed in the business. Where there is but little capital, the 
proprietor can employ but few workmen. He can purchase 
but a small stock of material, and his supply of tools and 
apparatus must necessarily be small. He can in such case 
set only a limited number of men to work, even if he could 
advance the amount necessary for their wages. Conse- 
quently, there can be but a small division of labor. 

6. There are some disadvantages as well as advantages in 
the division of labor, i. Such subdivisions of employment 
have a tendency to impair physical health. They afford too 
little variety of muscular exertion. While this is not uni- 
versally the case, it is too often so. There is the constant 
pressure upon certain portions of the body, and none upon 
others. There is a want of balance. There are also cer- 
tain processes which require an unnatural position, which, if 
long continued, is likely to induce deformity and perhaps 
disease. This liability, though perhaps less than it is some- 
times made to seem, is still actual, and demands considera- 
tion. 

2. It diminishes the self-reliance of laborers. It is apt to 
generate a feeling of dependence, since the worker may ac- 
quire the habit of expecting others to do almost every thing 
for him. One comes to regard one's self as only an element 
in a great system, — a small portion of a machine, which, as a 
whole, produces certain results. There are, doubtless, excep- 
tional instances, in which separation of employment develops 
individuality ; but it oftener has the opposite effect. 

Closely connected with this is the consequence that the 
number of those who do business on their own account is 



42 POLITICAL ECONOMY. 

diminished. It is not well that the proprietors in a com- 
munity should be few. Ownership, responsibility, the con- 
ciousness of being one's own master, foster manliness, and 
tend to the development of character. It is true, if all men 
were proprietors, the interests of industry might suffer ; but 
if only a very few were such, it would suffer still more. We 
should seek as far as possible to avoid the evils incident to 
either extreme. 

3. A third disadvantage, though closely connected with the 
second, is more serious than either of the others. In the 
minute subdivisions which characterize our modem indus- 
try, there is a hinderance to mental growth, — a contracting 
and belittling influence hard to resist. When a workman 
works all day, and day after day, boring holes or turning 
spindles, or cutting the same patterns with a jig-saw, it re- 
quires much effort both in and out of work-hours to keep 
the mind from a deterioration of which it is sad to think. I 
can scarcely conceive how any man of even moderate intel- 
ligence can be content to confine himself for any consider- 
able time to such sterile operations. It is true, that, under 
the conditions which such division of labor implies, there are 
found certain compensations. First, by this means, men are 
brought into communication with one another more than 
they would otherwise be. Information is thus gained, in- 
quiries suggested, and thought excited. All this is every way 
wholesome. Secondly, the very fact that many of these 
minute operations can be performed with but little draught 
on the mind, and some of them almost automatically, implies 
mental leisure in which thought can go on simultaneously 
with work. If the vacant hours be only moderately im- 
proved, culture and development need not be wholly wanting. 



CHAPTER VII. 

CONDITIONS OF HIGHEST PRODUCTION {continued). 

1. Closely connected with the subject of combination 
and division of labor, is that of the dwersification of industry. 
Upon this depends to no small extent the measure of the 
productiveness of a community. There is a somewhat prev- 
alent doctrine which is antagonistic to this. It is, that the 
principle of the division of labor should apply to separate 
communities, as well as to the different individuals of the 
same community. This doctrine is more frequently implied 
than explicitly stated. 

It is obvious enough, that each community should devote 
itself to such industries as it can on the whole pursue to the 
best advantage ; that it should not cherish those which it 
cannot thus pursue. In other words, no industry should be 
supported merely for the sake of the industry. But neither, 
on the other hand, should distribution of industries to differ- 
ent communities be practised for the sake of this distribu- 
tion. It is obvious, that, in proportion as such a distribution 
takes place, there must be a diminution of the diversity m 
each several community. If each society should confine 
itself to the production of two or three commodities, it must 
depend on other societies to furnish it with most of the 
articles which it may need. It has already been shown that 
the association, combination, and commerce, so essential to 



44 



POLITICAL ECONOMY. 



the prosperity if not to the existence of a community, can 
exist only where there are differences ; and that these differ- 
ences must exist in part in modes and forms of production. 
Hence to locate the differing -individuals in separate com- 
munities, and to cultivate a similarity in each, would be to 
put commerce at a disadvantage, and to rob men of the vast 
benefits of one chief element of their constitution. 

2. In every considerable community there are a great 
number of diverse tastes and aptitudes, many of which can- 
not be easily adjusted except to particular employments; 
and unless these exist, a large proportion of the labor-force 
will be either unapplied, or so applied as to lose much of its 
legitimate effect. 

It is not only that more and better work will be done, and 
therefore that greater productiveness will ensue, but there 
are a thousand things done which would otherwise fail of 
accompUshment, and a thousand things utilized which would 
otherwise be wasted. A manufacturing community in the 
midst of an agricultural region not only furnishes immediate 
exchange which must otherwise be sought at great expense 
of time and transportation, but it furnishes a market for 
scores of commodities which, remote from such a community, 
would be substantially valueless. Few are aware how great 
is the number of objects which at a distance from towns and 
cities are comparatively useless, but which in their imme- 
diate vicinity would constitute a source of wealth. 

Agriculture, in an extended section where it is nearly the 
exclusive business, is ever an employment of diminishing 
profit. The land wears out, and the waste both of labor 
and capital is prodigious. It is a remarkable fact, that 
famines are more frequent and more appalling in exclusively 
or chiefly agricultural regions than anywhere else. We can 
hardly conceive of a famine as possible in our Eastern States 



CONDITIONS OF HIGHEST PRODUCTION. 45 

or in England ; but in the most fertile regions of the West, 
twice within the last twenty-five years there have been ex- 
tensive and disastrous famines. This is necessarily inci- 
dental to an exclusively agricultural community. If there 
be but a single staple production, and that fails, the entire 
resources fail ; but if there be many industries, not all nor 
even a majority of them are likely to collapse at the same 
time. 

But this is only one aspect of the evil implied in a small 
number of industries. A doctrine already presented is, that 
no one occupation furnishes scope for more than a small 
fraction of the varied talent existing in a community. " If 
four millions are obliged to be rude laborers, when three 
milhons of them might be skilled artisans, the labor of one 
of the latter being supposed to be equal in value to three 
of the former, then the value actually created is to the value 
which might be created as four is to ten : in other words, 
the yearly product of the national industry might be two 
and a half times greater than it is, and the yearly unproduc- 
tive consumption need not be at all increased ; since, in 
either case, there would be four millions of people to be 
supplied with food and clothing and shelter." ^ 

3. Another condition of increased production is unre- 
stricted labor, and freedom of competition. But this free- 
dom must be real and practical, not merely theoretical. 
The power of the members of the community to associate 
must not be hindered, in order to the healthy circulation 
previously mentioned. To assure and preserve this free- 
dom, is one of the functions of government. It should pro- 
tect each member of society against fraud and violence. It 
cannot furnish labor, or create capital ; it cannot repeal the 
laws of nature, or enact new ones. But it may guard against 

I Bowen's Political Economy, pp. 84, 83. 



4^ POLITICAL ECONOMY. 

the destruction of the operation of these laws by artificial 
and vicious measures devised by selfish men. It may do 
something, at least, to discourage and limit combinations 
which would attempt to monopolize advantages in the inter- 
est of the few, to the exclusion of the many for whom they 
were intended, — schemes to prevent free and natural" com- 
petition, and to force labor and capital into unnatural chan- 
nels, to the detriment of the great masses of producers and 
consumers. It may take any available means to thwart any 
movement of interested foreign parties to overwhelm and 
destroy the nascent industries of its own citizens, as they 
come into competition with those of the former. 

4. An important condition of increasing productiveness 
is found in general education. The utility of education in its 
relation to human society is twofold. First, a certain de- 
gree of intelligence in the masses of the citizens is essential 
to the success, or even the existence, of a republican form 
of government. But the discussion of the subject in this 
respect belongs rather to the department of civil polity than 
to that of political economy. 

The economical advantage of education consists in the 
skill, discernment, and discrimination which it gives a man 
for his work ; the ability to adapt means to ends ; and, in a 
word, power over nature, so that he can the more readily 
avail himself of her resources, and command her services. 
Obviously every increase of this power is an increase of 
productive capability. 

It has always been admitted, that such native or acquired 
intellectual ability as enables one to discover new forces 
in nature, or to apply these in the industries, or to make 
new combinations of forces already known, is a vast and val- 
uable aid to production. Not less is the estimate to be put 
on the talent to organize and manage great business enter- 



CONDITIONS OF HIGHEST PRODUCTION. 47 

prises, so as to make the co-operation of labor and capital 
in them advantageous. Yet it is probable that the benefits 
thus resulting from education have been largely underesti- 
mated. The increase of power furnished by nature through 
the discoveries of science, and through human invention, is 
altogether incalculable. The steam-power of Great Britain, 
years ago, was estimated to be equal to the labor of six 
hundred millions of men. Thus in one little island, con- 
taining less than one-fortieth of the population of the earth, 
there has been developed a mechanical power equal to 
nearly or quite the whole human working- force of the 
planet ! This is only one of the contributions to human 
productiveness by educated mind. Yet much of this dis- 
covery comes from moderately educated men engaged in 
manual labor. 

There is another fact concerning education in relation to 
labor, which is worthy of note. It is, that the most ordi- 
nary education adds to the efficiency of the most ordinary 
laborer. Even a ditch-digger will do better work by reason 
of a rudimentary education. In all the rising grades of em- 
ployments, the more intelligent the laborer, — other things 
being equal, — the more effective the labor. Usually, too, 
when the laborer is even moderately educated, he is more 
likely to be frugal and prudent ; and, while producing more, 
he saves a larger part of that which is produced, thus effect- 
ing a double increase of the capital of the community. It 
also adds to his self-respect, and furnishes a motive to seek 
a competence and independence, and so, in several ways, 
contributes to the end for which it has inspired the hope. 

It is true, that, as education increases, the desires of men 
multiply, and the consumption will be greater. But con- 
sumption will increase less rapidly than production from this 
cause. Then, too, the increased desires are in themselves 



48 POLITICAL ECONOMY. 

a stimulus to exertion, and tend to create a larger demand 
for the results of labor. Thus there is no assignable limit 
to the multiplication of human desires creating a demand 
for those results of human effort whereby these desires are 
gratified. 

5. Finally, the productiveness of a community depends 
in no small degree on the moral character of its members. 
In order to any considerable productiveness, as we have seen, 
there must be association, combination, and mutual depend- 
ence. In order that these may exist, men must have con- 
fidence in each other. There must be individual honor, 
integrity, fidelity, or this cannot exist. Then, again, unless 
there be security for property, men will have neither much 
inducement to labor nor much incentive to save in order to 
accumulate capital. In proportion as morality is at a low 
grade, as fraud and violence are rife, or as peculation and 
swindling prevail among officials, and public trusts are be- 
trayed, will enterprise languish, capital seek safer localities, 
and thriftless poverty become the characteristic of the com- 
munity. On the other hand, where integrity and upright- 
ness abound in the society, there will be security to property, 
capital will not need to be so vigorously hedged about with 
expensive safeguards, labor will superintend itself at a great 
saving of cost, and all the interests of the community will 
feel the favorable effect. 



BOOK SECOND. 



CONSUMPTION. 



CHAPTER I. 

THE NATURE AND THE VARIOUS FORMS OF CONSUMPTION. 

1. Consumption is the destruction of forms of wealth. 
Production implies consumption. In general, all com- 
modities are destroyed in entering into new forms of 
wealth. Thus leather must be destroyed in order to pro- 
duce shoes. Flour must disappear in the manufacture of 
bread, and wheat in the making of flour. Every kind of 
implement or machine or structure is consumed by use. 
This consumption may be immediate (that is, by a single 
use), or it may be gradual. The fuel that we burn and 
the food that we eat are examples of the former ; tools, 
bridges, buildings, and aqueducts are examples of the 
latter. The consumption may be accomplished in a few 
days or months, or it may be protracted through centuries. 

2. The value which disappears in consumption is not 
necessarily lost. The value of the leather which the shoe- 
maker destroys re-appears in the shoes. The value of the 
lumber, stone, and brick consumed by the builder is repro- 
duced in the house. The seed which is cast into the soil 
utterly perishes, but it furnishes conditions of a value much 
greater than that which is destroyed. 

It is in this way that wealth increases ; not merely by 
adding to the valuable things already existing, but by destroy- 
ing many of these that there may issue still greater value. 

SI 



52 POLITICAL ECONOMY. 

The prosperity of a nation is not inversely as the consump- 
tion of values, nor is it precisely the opposite. Still, if there 
is very little consumption, there is very little increase of value. 
3. Consumption is either voluntary or involuntary. The 
former is exemplified in the instances heretofore noticed, 
where man destroys one commodity either for the purpose 
of producing another, or for the purpose of immediate grati- 
fication. Of the latter, we have instances in the natural 
decay of objects, as the rusting of iron, the mildew of cotton 
and woollen fabrics, and the wearing away, by attrition, of 
gold, silver, and other metals ; also the destruction caused 
by vermin. Much of this may be prevented by the prudent 
foresight which sound economy enjoins, but much loss will 
inevitably take place. A great deal of consumption comes 
by what is called accident. Much destruction is caused by 
fires, steam-boiler explosions, floods and tornadoes, earth- 
quakes and volcanic eruptions. 



CHAPTER II. 

PRODUCTIVE AND UNPRODUCTIVE CONSUMPTION. 

1. Voluntary consumption is either productive or unpro- 
ductive. The former is when the material appears in a new 
form and with higher value, as cloth made into garments, 
and iron into hardware and cutlery. Unproductive con- 
sumption occurs both in the instances previously men- 
tioned, — of consumption by natural decay, and that which 
comes by accident, — and in cases where gratification of de- 
sire is the sole object sought and achieved, as when one eats 
and drinks simply for enjoyment, and without reference to the 
repair of nature's waste or the nourishment of the system. 

It is not always easy to discriminate between these two 
kinds of consumption. We readily see the difference be- 
tween a man's drinking a quantity of whiskey, — not because 
it will help in the performance of any work, but because he 
likes it, — and the scattering of a quantity of seed over the 
ground in the spring. There is no doubt that one of these 
acts is productive, and the other unproductive. But there 
are cases where the distinction is less clear. 

It is not necessarily a case of unproductive consumption, 
when one destroys value for the sake of gratifying some 
desire. Probably a majority of men eat and drink simply 
because they desire food, having no thought of any ulterior 
object. Yet eating and drinking are absolutely essential 

-3 



54 POLITICAL ECONOMY, 

to productive labor. The wealth consumed in this way 
re-appears, to a large extent, in the products of human 
industry. 

2. Still there is much really unproductive consumption, — 
a destruction of value in the place of which no other value 
appears. There are, for instance, men and women 

" who creep 
Into this world to eat and sleep, 
And know no reason why they're born, 
But simply to consume the corn." 

Vast quantities of wealth are consumed in riotous living, 
in greedy and vulgar extravagance, and unmeaning magnifi- 
cence. There is also much consumption designed to be 
productive, but failing of its end through misdirection. In 
these ways, much wealth is consumed, with no consequent 
product. 

3. It is not always easy to draw the line between the 
conveniences of life and its luxuries ; nor can the extent to 
which the latter, in any sense of the term, are allowable, be 
precisely indicated. What to one class of persons may be a 
luxury, to another class may be almost a necessity. So 
what might in one age have been a rare and expensive in- 
dulgence, is in an advanced age among the most ordinary 
conveniences. I call special attention to three kinds of 
consumption.^ 

I. There is the consumption necessary to life and the 
performance of productive labor. The word necessary is 
used here in its liberal, rather than its restricted, sense. The 
absolute necessities of human life are very few. It does not 
even require much to keep a man in working condition. 
But to keep him where there is a larger kind of living, and 

* See Ruskin's Political Economy of Art. 



consumption: 55 

where his energies of both body and mind, together with 
the moral quaUties which render him the most efficient, are 
at their best, the consumption must be somewhat more 
generous. 

Besides subsistence, there must be materials, tools, and a 
variety of conditions involving the destruction of value. It 
is desirable to sustain a man, not as a mere savage, but to 
give him the largest possible volume of human life ; and the 
civilized man, it will be admitted, lives a broader life than 
the savage. We are not to forget that the object of political 
economy is rather to enhance the value of man than the 
multiplication of material wealth or the increase of com- 
merce, except as the latter are conditions of the former. 

2. A second kind of consumption is of such articles as 
minister to physical enjoyment, and meet a certain low order 
of mental appetencies. They are not essential to sustain 
life, or to render it more efficient. On the contrary, they 
often impair the vigor and competence of the person. At 
the best they simply gratify certain desires, without adding 
any thing to the value of the man. To this category belong 
mere dainty food; gold and jewels, and other ornaments 
worn for their showiness and not for any artistic excellence ; 
gay and costly apparel, in which the gayety and costliness are 
the main features. These constitute a class of luxuries that 
are in every sense non-productive. They favorably affect 
neither the individual nor society, and are, for the most part, 
hurtful to both. 

3. But not all consumption, the object of which is to 
gratify desire, is to be reckoned in this category. There 
are certain pleasures which ennoble and really enrich those 
who participate in them. There are desires, the gratification 
of which enlarges the volume of one's being. They are re- 
lated not so much to man's productive capability as to that 



56 POLITICAL ECONOMY. 

which is the final cause of all production, and to which all 
wealth is only a means. The labor, materials, implements, 
and whatever else is consumed in the production of the 
works or effects of genuine art, result in the most real wealth 
that exists. By this is meant not merely pictures, statues, 
books, carved work, tasteful tapestries, and similar objects 
which can be bought and sold ; but also oratorios which may 
be heard but once ; magnificent parks, to which you may be 
admitted, but which you may never own ; great actors and 
singers, whose genius may be exhibited to others, but not 
possessed by them. It is true, that much which properly 
belongs here may be so consumed as to deserve only a 
place in the second class ; but it may also have those higher 
and nobler uses which imply production in the best sense. 



CHAPTER HI. 

PUBLIC CONSUMPTION. 

1. Public consumption is the expenditure of means for 
society in its aggregate capacity. It has reference princi- 
pally to the cost of the operation of those agencies which 
are implied in the iQxm. government The reasons for the 
necessity of such expenditure have already been given. The 
purposes to which such consumption properly contributes 
may be grouped as follows : — 

{a) The support and administration of government. This 
embraces compensation to executive, legislative, and judicial 
officers, and expenditure for public buildings, {b) Works 
of public convenience. Here are included the paving and 
lighting of streets, water-works, sewerage, the light-house sys- 
tem, and some others. (<r) For the purpose of advancing 
science and promoting intelligence by means of exploring 
expeditions, geological surveys, meteorological and astronom- 
ical observations, etc. {d) The promotion of popular edu- 
cation, {e) The support of the poor, and relief of the 
afflicted. (/) The national defence. 

2. It would scarcely be possible to lay down any very 
definite general rule respecting the expenditures economi- 
cally allowable for any of the above purposes. Still some 
limitations may be indicated. 

As to the compensation which an officer of the govern- 

57 



58 POLITICAL ECONOMY. 

ment should receive, there has been some difference of opin- 
ion. On the one hand, it has been urged that it should be 
large and liberal j on the other, that it should be of such a 
moderate amount as would in itself be no temptation to any 
to seek the office. Some claim that the honor and respect 
which is attached to a position of public trust is in itself a 
considerable remuneration. No doubt there is, in a certain 
sense, something in this. In Great Britain, members of Par- 
liament serve without pecuniary reward. But it has been 
well said, that to require men who by education, character, 
and experience are competent to serve the public gratui- 
tously, or with no other reward than the honor and respect 
attached to the office, is to throw all such offices into the 
hands of the rich and those who are able to give their time 
to the public. In this way some, at least, of the best talent 
for the direction of public affairs would be excluded from 
participation in the government. The men who are pecu- 
niarily able to render gratuitous public service comprise a 
comparatively small class, and the number of them possess- 
ing the highest order of ability is not hkely to be sufficient 
for the duty required. 

What has been said on the question of any salary is appli- 
cable to that of a large or a small salary. The compensation 
should at least be such as the same ability would command 
in any other equally important business. But it must also 
be considered, that a man in a public office, especially if it 
be a prominent one, is obliged to adopt a somewhat more 
expensive style of living than one in a private station. There 
is a dignity appropriate to such a situation, with which the 
expenditures of the incumbent will properly enough be ex- 
pected to correspond. Under a republican form of govern- 
ment, the demand for this is less imperative than under a 
monarchy ; and, under any form of government, it is liable 



PUBLIC CONSUMPTlOlSr, 59 

to be carried to excess. Still some consideration is due to 
it. There should be neither meanness on the one hand, nor 
extravagance on the other. There should always be such 
salaries as will command the best abilities ; and these should 
be secured on their own account, and the officer held to the 
same accountability as a person in any other responsible 
position. 

What shall be the hmit of expenditures in the construction 
of public buildings ? About one point, there can be little 
dispute. There should be the least possible expense com- 
patible with the largest possible advantage. One extreme 
would be the cheapest structures which could be made to 
answer for the transaction of the pubhc business. They 
would be built in the plainest style, and with no regard to 
art or beauty. The opposite extreme would be to make 
them extravagantly costly and magnificent, till the main de- 
sign would be lost sight of in the splendor of the adorn- 
ments. There is a mean somewhere between niggardliness 
on the one hand and expensive ostentation on the other. 
It is for a nation, as well as for an individual, to make a 
reasonable use of art; and it is not essential to public 
economy that the public expenses should be only in the 
line of the necessary and the ordinary. 

3. The propriety of public expenditure for the purpose of 
general education has been incidentally but pretty fully dis- 
cussed in its relation to production. It is evident, if there 
is to be to any considerable extent an education for a 
large proportion of the people, the expense of it must be 
borne by the community as a whole. It is scarcely pos- 
sible to consider the subject in any of its bearings except, 
in part at least, under this aspect. The duty of the gov- 
ernment, as the agent of the whole society ; the necessity 
of education to the existence and permanence of popular 



60 POLITICAL ECONOMY. 

government; the moral consequences^ on the one hand, of 
its encouragement, and, on the other, of neglecting it ; and 
the vast economical benefit resulting from it, — are so uni- 
versally recognized among us, that it is unnecessary to add 
to what has been said. 

Closely connected with expenditures for education are 
those for the promotion of scientific discovery and the dif- 
fusion of intelligence. Very many of the expeditions, in- 
vestigations, and other measures for these purposes, are of 
a character which would prevent their being carried forward 
by private parties. The results which come from them are 
of vast benefit, not merely to some particular class, but to 
the community as a whole. Our own government some- 
times, through these agencies, performs services the value of 
which to our own country is a hundred-fold greater than 
that consumed in their maintenance. 

4. The question of pauperism is one of serious interest in 
all our modern communities. It is true that the theories of 
certain writers imply that it is not a matter pertaining to 
political economy at all, but rather one of benevolence 
and charity, such as a nation, in its corporate capacity, can- 
not be supposed to exercise. Some hold that the public 
support of the poor who are made so by the increase of 
population beyond the increase of capital, or who have be- 
come so by improvidence, is an interference with the laws 
of nature and the Divine appointments. But, however posi- 
tive these teachers are in asserting such theories, few of them 
would be forward in putting them in practice. For they are 
not inhumane men : it is only one instance among many 
where men are better than their creeds. 

But it is not difficult to show, that, to a certain extent, the 
public support of those who are not able to support them- 
selves is a matter of economy, as well as of charity. In any 
case it is certain that no civilized community can be found 



PUBLIC CONSUMPTION. 6 1 

in our day, where, whether prompted by humanity or by 
some other impulse, help will not be forthcoming to the 
unfortunate. Since this is so, the question is, how to make 
the provision as effectual as possible, and at as little cost. 
In many nations, there is no general arrangement by the 
government for the relief of the needy. There mendicancy 
takes the place of pauperism, and is unquestionably far more 
expensive as well as far more deleterious. In these nations, 
as in most others, there are various eleemosynary institutions, 
whose object is to relieve the needy. Provision is also made, 
to some extent, by churches and mutual-aid societies and 
benevolent associations. But after all that private benefi- 
cence can do, even when most efficiently organized, there 
will still be many cases which it cannot reach. 

Of the method of relief, a few words must suffice. It is 
obviously better that the system of caring for the poor 
should be local ; that is, it should pertain to the cities, towns, 
or counties, rather than to any larger political divisions. It 
is hardly possible for the government of any extensive terri- 
tory to ascertain, and properly treat, the poor of every local- 
ity. But the authorities of a town or of a city ward can 
more easily comprehend the wants of those within their own 
limits, and relieve their wants with better adaptations and 
greater economy, than could be done by a general govern- 
ment. 

5. The greatest and most ruinous consumption that takes 
place, in a palpable way, is that which is impHed in war. If 
there is not more actual and ruthless waste of wealth in this 
than in any other way, it is at least more direct and obvious 
here than elsewhere. Without taking time to discuss the 
methods by which wars may be prevented, it may be ad- 
mitted, that, in the present moral condition of humanity, war 
is a possibility to which any nation is liable. Self-defence is 



62 POLITICAL ECONOMY. 

a law of society, as well as of individual being. Hence all 
nations are expected to repel foreign invasions, and to re- 
press domestic insurrection. All force used in the execution 
of the laws is war in embryo. It follows, then, that the vast 
expenditures for war are not in every case uneconomical. 
When forced upon a nation by the alternative of subjugation 
or vigorous self-defence, the expenditures for this purpose 
are as legitimate as those of the government for any other 
purpose. 

The liability to such a condition, too, implies the propriety 
of a constant preparation for it. Indeed, this is one of the 
means of preventing it. This implies military defences, as 
forts and fortifications ; also, collections of all sorts of arms 
and materials in arsenals and military depots. There must 
be at least the nucleus of an army, if not a considerable 
number of armed men, even in time of peace ; and, in any 
case, such an enrolment of able-bodied men, and such en- 
couragement of military training, as will furnish the elements 
of an effective soldiery. To this end, too, there must be 
military and naval schools for the education of men com- 
petent to become officers and engineers. There must be 
vessels of war, navy-yards, and the armament and material 
implied in these. The costliness is very great : it forms an 
important part of the expenditure of every government. 

But while so much is admitted, there is in many countries 
an expenditure in this respect which is almost incredibly 
uneconomical. In the five great nations of Europe, the 
number and cost of the standing armies, as gathered from the 
statistics of a few years ago, are about as follows. In Austria 
the army consists of 280,000 men, and costs ^45,000,000 a 
year. France has an army of 430,000, at a cost of about 
^100,000,000. The German Empire maintains a force of 
420,000, at a cost of nearly ^90,000,000. Great Britain has 



PUBLIC CONSUMPTION. 63 

200,000 men, costing ^70,000,000. Russia has 800,000, at 
a cost of about ^117,000,000. 

Here, then, we have in five nations, and in time of peace, 
more than 2,000,000 men, comprising, of course, the most 
vigorous and valuable men in their several communities, 
taken from the ranks of productive industry, and, instead of 
adding to the wealth of the community, subtracting from it 
by large unproductive consumption. Four of these nations 
support heavy naval establishments, involving additional vast 
expenditures, and the absorption of many men. 



BOOK THIRD. 



EXCHANGE. 



CHAPTER I. 

PRINCIPLES WHICH FORM THE BASIS OF EXCHANGE. 

1. Exchange is the mutual and voluntary transfer of the 
right of property held by different persons. This definition . 
implies three things: i. That there is such a thing as a 
right of property. This right is universally acknowledged, 
except by a few extremists and doctrinaires. It arises from 
the creation of value through labor. The advantage thus 
achieved naturally belongs to the parties putting forth the 
labor, if it be the result of their labor alone. If this labor 
be united with capital in the production, then a propor- 
tionate part belongs to the laborer, and the remainder to the 
owner of the capital. Each owner has the right to trans- 
fer his ownership to another. 2. In order to an exchange, 
this transfer must be mutual. If only one of the parties 
makes a transfer, and there is no consideration, it is a gift. 
3. It must also be voluntary. If one is forced to relinquish 
one's right, it may be robbery : it is not exchange. 

2. The one great and essential want of man is association. 
We are created with divers abilities, tastes, and aptitudes. 
These constitute our individuality, which, as we have seen, 
is not only compatible with association, but necessary to it. 
It is the very diversity of human character which makes 
men dependent on one another, and thus renders association 
indispensable. It is this general principle which underlies 

67 



68 POLITICAL ECONOMY. 

exchange. It is the same as that which gives rise to the 
combination and division of labor in production. There are 
usually some very few kinds of labor to which each indi- 
vidual is adapted. Yet the variety of productive work is 
so great that each may easily find some place in which to 
exercise his particular gift. But, while man is thus limited 
in his individual productive capabilities, his desires and wants 
are almost limitless. Each can produce much more of 
one commodity than he can use ; but he can and will, if 
possible, consume many more than he can produce. He 
can create a single kind of value : he desires a thousand 
kinds. Hence arises exchange. Herein we find one of 
the chief of the elements which constitute human society. 
Commerce is a necessity of man's nature : it is the means 
that binds up together, and holds in harmony, the multi- 
farious elements and interests of a community. 

3. The same general principles govern in exchanges be- 
tween nations and remote communities. Yet it is to be 
noted and particularly considered, that the diversity existing 
between individuals must be greater than that between com- 
munities. The reasons for this have already been given. 
That the majority of individual occupations should exist in 
each community, rather than be distributed among several, is 
obvious. Yet God has so ordered, that there are natural 
diversities in nations, as well as in individuals. Every nation 
has some capability or facility which no other has. 

4. The words commerce and trade are, in common conver- 
sation and by most writers, used as nearly synonymous and 
interchangeable. Mr. Carey makes a clear, and, as it seems 
to me, a reasonable distinction between these terms, and as- 
signs to each a peculiar meaning. Commerce he defines as 
the intercourse of men with each other in the exchange of 
services, commodities, or ideas. Trade is the business of 
making exchanges/^?/- others. Commerce is the object ^om^X. 



THE BASIS OF EXCHANGE. 69 

to be accomplished: trade is the agency by which it is 
accomphshed. 

There are certain obstacles to direct exchange, which can- 
not be surmounted except by some kind of intermediate 
agency, and this makes the trader necessary. In this respect 
and to this extent, trade aids instead of antagonizing com- 
merce. It is certainly better for the community, that there 
be places of resort where every one is likely to find that of 
which he is in want, than to have to seek it among a variety 
of producers. Especially is this the case if the article is not 
produced in the vicinity. So, also, if one have an article of 
which he wishes to dispose, it is better to have some place 
where he is practically sure of finding a purchaser, than to 
spend days in the search for one. But the greater the number 
of commodities produced among themselves, and which are 
needed by members of the same community, the fewer will 
be the traders necessary to be employed, and the less costly 
will be the process of exchange. 



CHAPTER II. 

THE LAW OF EXCHANGE. 

1. The general law of exchange is value for value. This 
is implied in one of our previous statements concerning the 
essential nature of value ; namely, that it is the quantity of 
one commodity which may be equitably exchanged for a 
given quantity of another. It will be still more clearly seen 
if we recall our final definition : Value is our estimate of the 
sacrifice requisite to secure the possession of a desired object. 
This sacrifice, as we have seen, usually involves both labor 
and abstinence. It is sometimes spoken of as the cost of 
production, though the meaning of this expression is some- 
what modified in use. But the amount of labor implied in 
the production of a commodity is primarily and substan- 
tially what is meant by its cost. 

Now, when two commodities come into the market, they 
will exchange for each other in quantities which will be in- 
versely as the cost of production. If it require the labor 
of one day to produce a pair of shoes, and the labor also of 
a day to produce three bushels of oats, then the rule of 
exchange would be three bushels of oats for a pair of shoes. 
If it costs as much to produce sixty pounds of wheat, and 
bring it to the market, as it does to produce and bring to 
the market five pounds of beef, then the value of the latter 
is the same as that of the former ; and they may be equitably 
70 



THE LAW OF EXCHANGE. /I 

exchanged for each other. This is the natural rule, and this 
is what is meant by value for value. 

2. There are, however, various conditions which modify the 
operation of this law. The chief of these arises from the 
relations of supply and demand to normal value. Of these I 
shall speak hereafter. At present, let us recall the fact that 
value is a relative term. For this reason, there can be no 
such thing as a general rise or fall of values. If the value 
of any one thing rises or falls, that of something else must 
do the opposite. If all commodities are put in two classes, 
the value of one being expressed in terms of the other, they 
cannot both lose or gain at the same time, any more than 
the two arms of a balance can ascend or descend at the same 
time. If the value of the one is increased, the value of the 
other is diminished in an exactly corresponding ratio. So, 
if the value of thirty or forty or a hundred articles change, 
there must be a corresponding opposite change in the value 
of some other article or articles. If the value of the aggre- 
gate of all commodities save one be diminished^ the value 
of that one will be increased in the exact corresponding 
ratio. It makes no difference whether this be leather or cloth 
or wheat or money. 

3. We now come to consider supply and demand in rela- 
tion to value. The natural value of a commodity is that 
which corresponds with the cost of its production : it is the 
central value, or that toward which the market value is " con- 
stantly gravitating, and any deviation from which is but a 
temporary irregularity, which, the moment it exists, sets 
forces in motion tending to correct it. On an average of 
years sufficient to enable the oscillations on one side the cen- 
tral line to be compensated by those on the other, the mar- 
ket value agrees with the natural value ; but it very seldom 
agrees with it at any particular time. The sea everywhere 



^2 POLITICAL ECONOMY. 

tends to a level, but it never is at an exact level. Its sur- 
face is always ruffled by waves, and often agitated by storms. 
It is enough that no point, at least in the open sea, is per- 
manently higher than another. Each point is alternately 
elevated and depressed ; but the ocean preserves its level." ' 

In attributing to supply and demand the cause of this 
fluctuation of values, is implied the necessity of explaining 
these terms, not merely in their intrinsic signification, but in 
their relation to each other. To define them superficially, 
as applied to commercial affairs, is not difficult. Thus supply 
may be regarded as the total amount of any particular com- 
modity which is in the market, and demand as the total 
amount which the community desires to purchase. If there 
is more than the usual amount offered for sale, there will ordi- 
narily be a competition among the sellers ; and, as each would 
sell at something less than the usual profit, or, if it be a speed- 
ily perishable article, at no profit, or even at some loss, rather 
than lose the whole, there will be a diminution of prices, 
that is, of value expressed in money. On the other hand, if 
there be, for any reason, in the community an enlarged desire 
to purchase the commodity referred to, while the amount 
offered for sale remains the same, there will be a competition 
among the buyers ; some, at least, being willing to give more 
than the ordinary price rather than forego its possession. 
Hence prices will rise. 

The law of supply and demand derived from the foregoing 
observation is very simple. Other things being equal, i. 
The greater the supply, the less the price ; 2. The smaller 
the supply, the greater the price ; 3. The greater the de- 
mand, the greater the price ; 4. The smaller the demand, 
the less the price ; and, generally, the price will vary directly 
as the demand, and inversely as the supply. 

* Mill's Principles of Political Economy, vol. i. p. 557, 



THE LAW OF EXCHANGE. 73 

4. But, in order to a thorough understanding of the sub- 
ject, more careful examination is required. In the superficial 
statement previously made, supply represents a quantity, and 
demand a desire. But the quantity Represented by supply 
is not always the quantity in existence, but the quantity in the 
market. Now, not only does the quantity in the market 
affect the price, but the price affects the quantity in the mar- 
ket. If a farmer bring a load of wheat to market, expecting 
to sell it at a dollar a bushel, but finds that the price is only 
ninety cents, he may on that account withdraw it from the 
market, thus diminishing the supply. In other words, so 
long as the price is one dollar, the farmer's load is a part of 
the supply ; but at ninety cents the supply is smaller by the 
amount of that load. Here diminution of price has dimin- 
ished supply. 

So, by the statement previously made, the prominent ele- 
ment in demand is desire. But, obviously, mere desire for a 
commodity does not constitute commercial demand for it. 
In a town of five thousand inhabitants, there may be a thou- 
sand persons who desire diamonds. But there is no demand 
to this extent ; since probably not a hundred, and perhaps not 
a score, have the ability to purchase diamonds. Hence the 
meaning of demand is modified to desire with ability to pur- 
chase. This is sometimes called " effectual demand." 

5. But here another phenomenon presents itself Let us 
suppose a commodity of such cost that only persons who 
have an income of two thousand dollars a year can afford to 
purchase it. By some improvement in the facilities of pro- 
duction, the supply is doubled. According to the general 
law, the price will fall. Possibly it falls so much as to come 
within the reach of those whose income is one thousand dol- 
lars. Here, evidently, the demand is increased by the dimi- 
nution of the price. But by the general law the increase of 



74 POLITICAL ECONOMY. 

demand increases the price. In this case, as in that of sup- 
ply, the law is met by a counter law. Another interesting fact 
emerges here. The diminution of the price has increased 
the demand to the extent that not only those with an income 
of two thousand dollars can purchase it, but also those with 
an income of one thousand dollars. As the latter class is 
several times more numerous than the former, it follows that 
the demand is several times larger than when the higher price 
ruled. This will again increase the price, which will ascend 
till it reaches a point where only those having an income 
somewhere between one and two thousand dollars can afford 
to purchase. This, then, is the general law of prices : they 
tend to seek the level of the cost of production. When 
demand and supply from any cause become unequal, the 
natural competition of both labor and capital immediately 
operates to restore the equilibrium. 

6. So far we have been considering cases where the supply 
is not restricted, and the production interrupted, by extrane- 
ous causes. There are cases, however, where such limita- 
tions do exist so that there can be either no immediate 
increase, or really no increase at all. As an instance of the 
former, suppose a community in which the crop of grain 
has been cut off so that there is only one-half or one-third 
the usual amount, which usual amount was just adequate 
to the wants of the people. If the community is so separated 
from the rest of the world that importation is out of the 
question, it is plain, there can be no increase of the quantity 
till the next year. In such a case, there would be a great 
rise of prices, with no corrective principle to restore the 
natural level. 

There is another case where the supply is absolutely lim- 
ited, not for a season only, but forever. There are certain 
commodities, to the number of which there can be no pes- 



THE LA W OF EXCHANGE. 75 

sible addition. Such are works of art by famous masters 
now dead, antique coins, rare volumes long out of print and 
impossible of imitation, and manuscripts of ancient docu- 
ments. Of such, the cost of production furnishes no stand- 
ard of value whatever. If two or three pictures by Raphael 
or Murillo or Titian were offered for sale in one of our 
great cities, thousands of persons might desire to possess 
one of them ; but only a very few could do so. If put up at 
auction, the prices offered by the mass of those who would 
like to secure them would soon be surpassed by those offered 
by a small number. This number would be quickly reduced 
to fifty, then to thirty, to twenty, to ten, and finally to a 
number equal to the number of pictures for sale ; that is, to 
a number where the supply was just equal to the demand at 
so high a price. 

7. Supply and demand operate in still other ways, and 
are affected by other causes, than those already mentioned. 

1. If there be a suddenly enlarged demand for a com- 
modity not readily admitting of increased production, the 
price will be likely to rise more rapidly, and to a higher 
point, than in cases of continuous production and readily 
multiplied facilities for enlarging the supply. There are arti- 
cles of which only a limited quantity is kept on hand and for 
sale in a community of moderate numbers, and which are 
produced at some distance from the place of consumption. 
Thus, in a small way, we may have seen this exemplified, 
when, in the late autumn or early winter, there is but little 
wood in a village or town, and the roads are so bad that for 
weeks scarcely any can be hauled from the country. The 
price will increase more, and more rapidly, than when the 
scarcity is one the anticipation of which would bring con- 
siderable quantities to the market. 

2. It also makes a difference whether the article be a 



76 POLITICAL ECONOMY, 

necessary or only a luxury. If it be the former, the price 
will rise higher and more rapidly than if it were the latter. 
A man will double and treble his payment for bread, rather 
than go hungry ; but, if diamonds are scarce, one can get on 
tolerably without them. 

3. So, on the other hand, if there were to be a greatly in- 
creased supply of a perishable article, the price will fall more 
rapidly than in case of a more durable commodity. In the 
early autumn, there may be, in a market-town, two or three 
times as many peaches as are ordinarily consumed : as these 
will quickly decay, prices will go far below the natural 
value, since it will be better for the seller to get back even 
a part of their cost, than to have them perish on his hands. 
But if instead of peaches the commodity be cloth or iron 
or leather, the difference of price occasioned by an over- 
stocked market is comparatively small. There are other 
cases of variation ; but these illustrations are, perhaps, all that 
are necessary. 



CHAPTER III. 

THE PROMOTION OF COMMERCE. 

1. Whatever tends to promote association conduces to 
human prosperity. Every obstruction to this is a damage. 
If men are kept apart so that they cannot combine, produc- 
tion will be scanty, and man, in the struggle with nature, will 
be at great disadvantage. Whatever brings men into such 
relations that all can minister freely to each, and each to all, 
furnishes increments of power. We have seen what are the 
conditions of high productiveness in a community, and that 
all these are in some way related to association. The same 
is true in the promotion of commerce. 

2. Commerce will be promoted in general by such con- 
ditions as will render exchanges easy, frequent, and rapid. 
It is an advantage to the producer, to be able to dispose of 
his product as soon as possible after he has completed it. 
Whatever compels him to retain it on his hands for an 
indefinite period, or makes the opportunities of exchange 
remote and expensive, is detrimental to commerce and to 
all the interests it is designed to subserve. This is more 
obvious in the case of some commodities than in that of 
others. Many agricultural products must be sold within the 
year; others within a briefer period, or not at all. Certain 
garments and articles of personal decoration must also be 
sold within a moderate time after their manufacture, or they 
will become valueless through a change of the fashion. 

77 



^8 POLITICAL ECONOMY. 

The more readily a man can sell his own products, the 
more readily can he purchase those of others. Herein is 
implied that vigorous societary circulation which is charac- 
teristic of prosperous communities. Some of the particular 
conditions upon which this depends will now be set forth. 

3. Commerce is promoted by the close proximity of pro- 
ducer and consumer. The first and most burdensome tax 
which the producer has to pay is that of transportatio7i. 
This is more especially the case with the producer of raw 
material and of heavier and coarser commodities. It bears 
with particular weight upon the agriculturist. " If we esti- 
mate wheat at one dollar, and corn at fifty cents, a bushel, 
the value of the former will disappear, or become equal to 
zero, at two hundred and twenty miles, and the latter at a 
hundred and ten, if they must be conveyed by teams on com- 
mon highways. Beyond those distances they will respec- 
tively become worthless for the purposes of sale, and the 
producer can have no pecuniary inducement to raise any 
larger quantity than suffices for his own consumption. The 
bulkier products — like potatoes, turnips, cabbages, etc. — be- 
come valueless at a still smaller distance. At twenty-five 
cents a bushel, potatoes cease to afford any remuneration to 
the grower fifty miles by common roads from markets, even 
if land were gratuitous, and the labor devoted to their culti- 
vation could be procured for nothing. " ' 

All so far said has reference to transportation by common 
roads. Every means by which this expense is diminished 
is a means of facilitating commerce. In the earlier periods 
of society, where there are no roads, and men have not even 
learned to avail themselves of beasts of burden, it is easy 
to see that there can be but little association, and the 
exchanges must be few. When these are brought into use, 

» E. Peshinc Smith, Manual of Political Economy, p. 196. 



THE PROMOTION OF COMMERCE. 79 

commerce will increase. When the iron railway supersedes 
the common road, and when resort is had to canals and 
water-courses, the obstacles are further diminished. But, 
under any system of transporting raw commodities great dis- 
tances, their value is much less than if they were needed for 
consumption in the neighborhood. A bushel of com raised 
in Nebraska will sell for a dollar in Massachusetts ; but the 
producer must pay seventy-five cents to get it there. He 
may take his pay in cotton or woollen cloth, but he must pay 
something for their carriage ; so that perhaps, counting the 
expense both ways, he scarcely realizes one-eighth as much 
for his product as if there were a Lowell or Manchester near 
by, instead of thirteen hundred miles distant. Cotton is 
raised in Alabama, and carried to England, four thousand 
miles away. Cloth is manufactured from this cotton, and 
carried back to Alabama. Now, the Alabama planter must 
sell his cotton for as much less than it will bring in Eng- 
land, as is required to pay not only the freight, but also 
insurance, brokers' commissions, and profits of merchants. 
He must pay a correspondingly additional price for his 
cloth. Some one has said, that, as it is cheaper to transport 
cloth than cotton, the planters would make a large saving if 
they would build factories in Alabama, convert the cotton 
into cloth, transport the cloth to England, and then bring it 
back to Alabama ! It is impossible to estimate the diminu- 
tion of expense when transportation is reduced to its lowest 
limits by bringing the several classes of producers into the 
closest possible proximity. 

Nor is this all. There is a very large amount of both 
actual and possible product which cannot be exchanged at 
all when the producers are at remote distances from one an- 
other. We have already seen, that when local centres, in the 
form of manufacturing towns, are maintained in the midst of 



So POLITICAL ECONOMY. 

agricultural regions, there is, in addition to the great trans- 
portable staples, a vast variety of untransportable produce 
which finds a ready market. This requires comparatively 
little additional labor and capital. The value of it some- 
times amounts to nearly as much in the aggregate as that of 
the main staples. There is thus not only a much greater 
productiveness, but a greater variety as well as larger facilities 
of exchange. 

4. Closely connected with the advantage of the proximity 
of producer and consumer is that of a large diversification 
of industries. Indeed, in an important sense, the former 
depends upon the latter. It is only when one produces much 
of a single commodity, that one has the means to purchase 
many other commodities. As association or commerce de- 
pends on differences among individuals ; the more numerous 
the differences, the more frequent and more extensive the 
exchanges. " In every community, the more numerous are 
the producers and the more various the productions, the more 
prompt, numerous, and extensive are the vents for those pro- 
ductions ; and, by a natural consequence, the more profitable 
are they to the producers, for prices rise with the demand. 
But this advantage is to be derived from real production 
alone, and not from forced circulation of products ; for a 
value once created is not augmented in its passage from 
one hand to another." ' 

Just in proportion to the diversity of character and capa- 
bility in a community, will that community approximate 
perfection ; for the perfection of society consists in the pres- 
ence and combination, in proper proportions, of all the really 
different natural elements of humanity embodied in the va- 
rious individual members, so that each will meet some want 
which another cannot supply. In a greatly heterogeneous 

» Say's Political Economy, American edition, p. 8i. 



THE PROMOTION OF COMMERCE. 8 1 

society, the development is greater, and there is a higher 
education, and more skill, invention, and enterprise, than in 
the opposite. Such a society will devise new industries 
pecuHar to itself, and will thus furnish occasions for exchange 
with other communities, far more than would otherwise be 

the case. 

There are two other topics which are intimately connected 
with the commercial prosperity of a comm.unity; but they 
are of such great importance and of so complicated a char- 
acter, that they need to be discussed at considerable length. 
I refer to the questions oi free trade and protection, and 
the subject of finance. 



CHAPTER IV. 

PROTECTION AND FREE TRADE. 

1. A PROTECTIVE tariff, so called, is a system of duties 
levied by the government of a country on commodities 
produced in other countries, to prevent their coming into 
unequal competition with similar commodities of domestic 
production in such a way as to cripple or destroy the industry 
implied in the latter. Thus, suppose that iron may be manu- 
factured in England, and delivered here at twenty dollars 
a ton ; while, at the ordinary rate of profit and wages, iron 
could not at present be manufactured here for less than 
twenty-five dollars a ton. A duty of five dollars a ton is 
levied on the foreign iron. This enables our manufacturers 
to compete with those of England in our own market. It 
is claimed that in this way the home industry gets a chance 
to live, and become developed, and that such a develop- 
ment is an advantage to the country greater than the loss 
implied in the increase of price. We are not to consider 
here these duties in the light of a revenue to the govern- 
ment, though this they may be at the same time. But it is 
the protective feature only that we are to discuss ; and, for 
that reason, it is desirable to abstract it from the revenue 
feature. 

Free trade, as a theory, opposes all those duties the design 
of which is to afford any advantage to domestic industry. 
82 



PROTECTION AND FREE TRADE. 83 

It implies the same freedom of intercourse between pro- 
ducers in different nations as between those in the same 
community. 

2. In an elementary treatise it is proper, that, on contro- 
verted questions, there should be a fair statement of the main 
arguments on both sides ; though it is not necessary that the 
writer should conceal his own convictions. 

The following are the principal positive arguments in 
favor of a restrictive system : — 

I. It is said to be the only sure defence of new and feeble 
industries against the unequal competition of those long estab- 
lished in other communities. Freedom of competition is 
advocated by all parties. But it is denied that this exists in 
the cases above supposed. A community which has long 
experience, skilled labor, and accumulated capital, possesses 
advantages in the contest with a nation which is destitute of 
them. A restrictive system is the only method by which 
industries which have been for any reason wanting, especially 
in a new country, can be built up in competition with those 
of the same kind long established in another nation. Time, 
experience, and accumulated capitals give a superiority which 
must prove fatal to the industries which are wanting in these 
respects, unless resort be had to artificial measures to equal- 
ize the condition. This is admitted by J. S. Mill, the ablest 
as well as the most candid of recent free-trade writers. 
He says, " The superiority of one country over another, in a 
branch of production, often arises only from having begun 
it sooner. It cannot be expected that individuals should at 
their own risk, or rather to their certain loss, introduce a new 
manufacture, or bear the burden of carrying it on, until the 
producers have been educated up to the level of those with 
whom the processes have become traditional. A protective 
duty continued for a reasonable time will sometimes be the 



84 POLITICAL ECONOMY. 

least inconvenient mode in which a country can tax itself for 
the support of such an experiment." ^ 

But, besides these natural advantages of an older and more 
experienced community, there is another of a purely artificial 
character, which is liable to be taken. Sometimes the man- 
ufacturers of one country adopt positive measures to break 
down the competing industries in feebler communities. To 
show that this is no chimera, the report of a British parlia- 
mentary committee, made about the year 1858, is sometimes 
cited. " The laboring classes generally, in the manufacturing 
districts of this country, are very little aware of the extent to 
which they are often indebted, for their being employed at 
all, to the immense losses which their employers voluntarily 
incur in bad times in order to destroy foreign competition, 
and to gain and keep possession of foreign markets. Au- 
thentic instances are well known of employers having in such 
times carried on their works at a loss amounting in the aggre- 
gate to three or four hundred thousand pounds in the course 
of three or four years. If the efforts of those who encour- 
age the combination were to be successful for any length of 
time, the great accumulations of capital could no longer be 
made, which enable a few of the most wealthy capitaHsts to 
overwhelm all foreign competition in times of great depres- 
sion, and thus clear the way for the whole trade to step in 
when prices revive, and to carry on a great business before 
foreign capital can again accumulate to such an extent as to 
be able to establish a competition in prices with any chance 
of success. The large capitals of this country are the great 
instruments of warfare (if the expression may be allowed) 
against the competing capital of foreign countries." 

Said Lord Brougham in 181 5 in Parliament, "England 
can afford to incur some loss on the export of English goods, 

* Principles of Political Economy (American edition), vol. ii. j^. 538, 539. 



PROTECTION AND FREE TRADE. 85 

for the purpose of destroying foreign manufactures in their 
cradle." Since such purposes are avowed, and since large 
capitals are used as " instruments of warfare " to break down 
foreign competing industries, there ought to be some de- 
fence against them. Such a defence, it is claimed, is found 
in a system of restrictive duties. 

2. It is urged that such a system gives a steady and uni- 
form market at an expense far less than the benefit accruing. 
Domestic commerce is liable to disturbances and revulsions 
through the free admission of commodities from the prolific 
industries of older countries. If the manufacturer be re- 
heved from this unequal competition, he can keep his capi- 
tal constantly employed, and, by reason of furnishing steady 
work, can secure better labor at less cost. Otherwise he 
may be compelled to stop work half of the time, and let his 
machinery lie idle, dismisshig his laborers, to their great loss 
and distress. This is one reason why, as will hereafter be 
seen, it is claimed that manufactured products are often sold 
at lower prices under a protective tarifi" than when no duty 
is levied on the imported article. It is thought to be evi- 
dent from these considerations, that certain desirable indus- 
tries will spring up at once, and without appreciable extra 
expense, if they have a fair chance, which may nevertheless 
be prevented by unequal competition. They simply need 
to be shielded from the malign influence of parties inter- 
ested to break them down, as well as from that of the natu- 
ral inequality which exists between an infant industry and 
one that is fully developed. 

3. It is urged in favor of protection, that it greatly aids 
the tendency to that societary coinpleteness which is the final 
cause of association. The less obstructed the latter is, the 
more nearly perfect will the former become, and the stronger 
and more competent will men be. This freedom of asso- 



S6 POLITICAL ECONOMY. 

ciation, as we have seen, depends upon the individual dif- 
ferences both of character and calHng which prevail in a 
community. A variety of industries would be likely to grow 
up in any society left free to the development of its own 
resources. But a new society, whose nascent industries are 
in competition with those of an older and richer community, 
is not left free to develop its resources : the so-called free- 
dom becomes a positive repression. 

4. The restrictive system is regarded as a7i advajitage to 
the general interests of the comnmnity, as well as to those 
particularly protected. If this were not the case, it would 
be altogether undeserving of support. We may take as a 
representative of these agriculture, since this is the funda- 
mental industry, and, if the statement is true concerning this, 
it undoubtedly is of all others. In considering the protec- 
tive system in relation to agriculture, several things are to be 
taken into account. 

(i) First, there is the question of transportation. That 
every reasonable means should be taken to diminish the 
expense of this, no one doubts. It cannot be effected by 
doing or continuing to do the least immediately costly thing, 
but, frequently, only by going to much additional expense. 
This expense, however, is once for all ; and so, on the whole, 
it is less expensive. To build a wagon-road where there was 
none before, involves an outlay sometimes of hundreds of 
thousands of dollars. It may add only a small amount the 
first year to the profit of each producer living near it ; but 
in a brief period thereafter, the advantage will amount to 
much more than the whole cost of construction. The same 
principle applies in the building of railways and the making 
of canals. 

If it is good economy to go to great expense to increase 
the power of association by means of roads and other transit 



PROTECTION AND FREE TRADE. By 

arrangements, it certainly cannot be poor economy to go to 
some expense for the purpose, so far as the conditions allow, 
of doing away with transportation altogether. Restrictive 
duties, even when the conditions are the least favorable, are 
often the least expensive method by which the producer and 
the consumer can be brought into close proximity. 

(2) Again, unless manufacturing centres exist in the 
midst of agricultural areas, products of the soil must be 
conveyed to a great distance. But if/u's implies virtually an 
exportation of the soil, and this is a diminution of the capital 
of the farmer. There are many illustrations of this. Fifty 
years ago Western New York was one of the richest wheat- 
producing regions in the world : twenty-five years later it 
had so deteriorated that the crops were scarcely half their 
former amount. The wheat- fields of Ohio formerly yielded 
as high as thirty bushels to the acre : they afterwards fell 
off to fifteen and thirteen. The same process is going on in 
Illinois, Wisconsin, Iowa, and other purely agricultural re- 
gions. The soil is being rapidly exhausted, except where it 
is kept up by artificial fertilization. It has been said, that 
this " might be done universally as well as in a few cases. 
But the fact that almost universally it is not done, would 
seem to indicate some natural reason for the failure. 

On the other hand, agricultural estates within moderate 
distances from manufacturing centres tend to a constant 
increase of efiiciency. " In England, in the days of the 
Plantagenets, when the population but little exceeded two 
millions, an acre of land yielded but six bushels of wheat ; 
and, small as were the number to be fed, famines were fre- 
quent and severe. To-day we see eighteen milHons oc- 
cupying the same surface, and obtaining greatly increased 
supplies of very superior food." The yield of wheat now in 
England is thirty, forty, and even fifty bushels to the acre. 



88 POLITICAL ECONOMY. 

In France the product of grain has nearly doubled within 
a single century, while the pojDulation has increased only 
about fifty per cent. Here, as also in England, are new 
varieties of produce, which by themselves are equivalent to 
two-thirds of all the food formerly produced. There are 
still more striking illustrations found in Holland and Bel- 
gium, and in many other countries there are remarkable 
instances of a similar kind. This condition of things is pos- 
sible only with a diversified industry out of which will come 
populous centres. This, in a new country, is conditioned on 
considerable expenditure, and such public measures as will 
prevent destructive foreign competition. 

(3) A third advantage to agriculture is alleged to be 
found in the utilization of materials which would otherwise 
be wasted. In exclusively agricultural sections, an incalcu- 
lable amount of produce, which might be furnished at 
scarcely any additional expense, is lost by reason of the 
difficulty or impossibility of transportation. It is only in 
the vicinity of manufacturing centres, that certain articles 
have any value at all. It was said some twenty-five years 
ago, that the crop of straw in France was utilized to the 
amount of a hundred and fifty miUion dollars a year. This is 
more than the value of our whole cotton-crop at that time, 
— a crop which employed the principal part of the capital 
and labor of ten States, and was the largest export by far of 
all our great staples. Yet, in large agricultural areas of our 
country, this material is every year burned in the fields where 
it grows. 

5 . A fifth argument advanced in favor of protection is, that 
// tends to prevent the degradation of labor in the country 
protected. It is generally urged, that one chief reason why 
in our own country manufactures are at a disadvantage in 
relation to those of European nations, is because the com- 



PROTECTION AND FREE TRADE. 89 

pensation there is smaller than here. Even in England, 
where it is better than in most parts of the Continent, all the 
ruder kinds of labor are at a price which affords only such 
and so much sustenance as will keep the subject in a fair 
working condition. The great mass of this class is exceed- 
ingly poor, there are among them scarcely any savings, there 
is little inducement to them to endeavor to improve their 
condition, and there is very little hope to them of amelio- 
ration. Now, it is thought to be inevitable, that free recip- 
rocal commerce with a country whose system produces such 
consequences can but result in reducing our own laboring 
population to nearly the same level. Two lakes lying near 
each other, but between which there is a channel of un- 
restricted communication, will stand at the same level. 



CHAPTER V. 

ARGUMENTS IN FAVOR OF FREE TRADE. 

1. The following are the main arguments in favor of free 
trade : — 

I. It is said to be the method of nature. There is a 
great variety in the relative advantages possessed by differ- 
ent countries for the production of different commodities. 
" For instance, the mixture of coal and iron-stone in alternate 
seams gives England a striking advantage in the manufac- 
ture of hardware. On the other hand, a country like France 
has peculiar facilities for the growth of wheat : her land is 
fertile, and her labor is cheap. It may therefore be assumed, 
that in England iron is comparatively less costly to produce 
than wheat, and that in France the production of wheat is 
comparatively less costly than that of iron. In order to ex- 
plain the advantage which each of these derives from trad- 
ing with the other, let it be supposed that in France the 
production of a ton of pig-iron requires as much labor and 
capital as the production of twenty sacks of wheat ; but that 
in England the same quantity of iron requires as much labor 
and capital as would produce ten sacks of wheat ; then iron 
estimated in wheat is twice as valuable in France as in Eng- 
land. England, therefore, might say to France, ' It will be 
greatly to our mutual advantage if you will let me supply 
you with iron, and receive from you wheat in exchange for 
90 



ARGUMENTS IN FA VOR OF FREE TRADE. 9I 

it. For, suppose you give me fifteen sacks of wheat for each 
ton of iron, then we shall each gain five sacks of wheat on 
every transaction. If you manufacture the ton of iron your- 
self, it would cost you as much as twenty sacks of wheat ; 
whereas you have only to give me fifteen sacks. On the 
other hand, I should only be able to get ten sacks of wheat 
for a ton of iron, if I sold the iron in my own country. We, 
therefore, each of us obtain a profit upon the transaction 
which is represented in value by five sacks of wheat. This 
is a great gain and saving of wealth, for the gain is made at 
no one's expense.' " ' 

2. Free trade is said to conserve and increase the productive 
power of labor, by causing it to be apphed to those particu- 
lar branches of industry for which each community has the 
greatest natural advantage. It is admitted by every one, that 
it would be a great waste to attempt the introduction of cer- 
tain industries into places which furnish no natural facilities for 
them, and where no facilities can be created. To essay the 
cultivation of oranges in Minnesota, or cotton in Iowa, instead 
of raising wheat in both and exchanging it for the oranges 
and cotton, would be obviously preposterous. If it would 
be altogether unprofitable to undertake the cultivation of a 
new product where the facilities are wholly wanting, would it 
not be to some extent unprofitable where they are partly 
adverse? Hence all industries whose introduction depends 
upon artificial measures and considerable expense are re- 
garded as so far forth uneconomical. If successful in their 
estabhshment, it is said, they can but divert labor and capital 
from those employments for which better conditions exist, 
and thus diminish the productive power of the community. 

3. " The right of property implies freedom for every one to 
do what he will with his own, provided he does not infringe 

» Henry Fawcett: Manual of Political Economy, pp. 372, 373- 



92 POLITICAL ECONOMY. 

on tin rights of others y Any restriction of this freedom is 
prima facie a violation of a natural and inherent right. 
Every man is entitled to use the products of his own labor 
as may seem most for his advantage, to exchange them with 
citizens of his own country or with foreigners, as he may get 
for them the largest compensation. Any interference with 
this right bears the semblance of robbery.^ 

4. ^'' All obstruction to the exchange of commodities be- 
tween any two countries desiring each other's products 7nust 
injuriously affect the interests of bothy This is clearly seen 
in the case of natural obstacles. Mr. Amasa Walker makes 
use of the following illustration : " Two communities dwelling 
near each other are separated by a lofty chain of mountains, 
which renders transportation between them so difficult as to 
nearly preclude all intercourse. On one side of the moun- 
tain the soil is so admirably adapted to cereals that wheat 
(and other grains in proportion) can be produced at the rate 
of one bushel for a day's labor ; while fuel is so difficult to be 
obtained, that six days' labor are required to produce one 
ton of coal. 

" On the opposite side of the mountain-range, so little is 
the soil adapted to the culture of grain that three days' labor 
are required to produce a single bushel of wheat ; while the 
facilities for mining coal are so great that one day's labor 
will purchase a ton. Under such circumstances, it would 
evidently be quite advantageous to both communities to ex- 
change products, if there were no obstacles to prevent their 
doing so. Owing, however, to the resistance which the sup- 
posed mountains interpose, the transportation of a bushel 
of wheat is equivalent to two days' labor ; so that the wheat 
would cost three days' labor when brought to the coal country, 
and for that amount of labor the inhabitants could procure it 

* Chapin's Wayland's Political Economy, p. 356. 



ARGUMENTS IN FAVOR OF FREE TRADE. 93 

themselves. So of the coal : to transport a ton which cost 
but one day's labor at the mines, would require the labor of five 
days • and therefore the people in the grain country, who can 
produce it by six days' work, would gain nothing by getting 
it from abroad. For these reasons, there would be no trade 
or exchange of products, so far as those articles were con- 
cerned, except in case of some accident, - as the failure of a 
crop, or an unexpected obstruction to the process of mimng, 
by which the cost of the supposed commodity should be 
enhanced. Virtually there would be no profitable trade 
between the two communities, although in one coal was six 
times as dear, and in the other wheat was three times as 
dear, as in the neighboring country. 

"If however, we now suppose a railway to be maae 
which' reduces the transportation of a bushel of wheat to 
one day's labor, and the freight of a ton of coal to three 
days' we shall have conditions under which an advantageous 
trade will be sure to spring up : since the wheat-grower of 
the grain country can now get a ton of coal for the labor of 
four days, thus saving two days on each ton, equal to thirty- 
three and one-third per cent; and the coal-miner can get a 
bushel of wheat for two days' labor instead of three thus 
saving, as far as his consumption of wheat is concerned, one- 
third, or thirty-three and one-third per cent, of his labor. 

That in such a case the removal of the obstruction, though 
at a very great cost, would result in far greater profit to both 
communities, has already been clearly shown in the chapter 
on the " Promotion of Commerce." It is claimed to follow 
from this, that, if the removal of obstructions to the freedom 
of commercial intercourse is beneficial, the creation of ob- 
structions or restrictions, in whatever form, must be delete- 
nous and damaging. 

I Science of Wealth, pp. 94-96. 



94 POLITICAL ECONOMY. 

5. " Free commercial intercourse between the nations of the 
earth tends evidently to establish their mutual relations upon 
a basis of peace and good- will By the mutual exchange of 
values, different peoples become acquainted with each other ; 
and the feeling of interdependence creates a common inter- 
est, out of which grow the bonds of abiding friendship. 
Within the last two hundred years, international law has come 
to the dignity of a distinct science. Its development and 
growth have been coincident with the expansion of com- 
merce under the improved facilities secured by recent inven- 
tions. The spontaneous and necessary intercourse of nations 
originates international law, and leads to the establishment 
of rules for governing that intercourse. The more the prin- 
ciples and rules of this department of law are studied, the 
more clearly does it appear, that, through free commercial re- 
lations, the separate interests of all nations are bound together 
in one, so that each is concerned in the welfare of every 
other, and each is induced to place itself in an attitude of 
friendship rather than of enmity towards others. Free trade, 
then, appears thus the promoter and pledge of peace in the 
world. The broad competition which it incites tends to 
swell the sum of human comforts and joys, and to impel 
every branch of the race to improve to the utmost the 
conditions of human living." ' 

2. Some of the strongest arguments in favor of free trade 
will, from the very nature of the case, be found in the form 
of objections to protection. Some of these I will briefly set 
forth. 

I. Protective duties violate the right of every man to do 
what he will with his own. He has the natural right to buy 
where he can buy at the best advantage ; and if the Govern- 
ment, by any kind of restriction, prevents his doing this, it 

I Chapin's Wayland, p. 357. 



ARGUMENTS IN FA VOR OF FREE TRADE. 95 

goes beyond its authorized limits, and does him a positive 
injury. 

2. Restrictive duties are of the nature of a tax upon all 
the other industries, for the support of those protected. This 
may be illustrated by the instance of the duty on iron. As 
was seen in the previous statement of the case, a duty of five 
dollars a ton on the foreign product would enable the Amer- 
ican producer to compete with the foreign manufacturers. 
The objection claims that all iron — not only that imported, 
but that manufactured at home — is five dollars a ton higher 
in price by reason of this duty. That is, supposing that 
one hundred thousand tons are imported : the duties paid 
to the Government amount to five hundred thousand dol- 
lars. But suppose there are also three hundred thousand 
tons made here : this being also five dollars a ton higher 
than without restriction, the aggregate additional amount 
paid will be fifteen hundred thousand dollars, none of which 
goes to the Government as revenue, but all to the manufac- 
turers as bonus ; and all of it must be contributed by the 
users of iron. 

3. It is objected further to the restrictive system, that // 
causes a diminution of exports from the country adopting it. 
The argument is, in brief, that, by restricting the imports, the 
country loses the opportunity of selling to foreign producers, 
since they must pay for commodities purchased of the for- 
mer with goods of their own ; and, if their goods are not 
taken, they cannot purchase others. 

4. It is also objected, that, while the system is advocated 
as a protection to infant industries, these never come to ma- 
turity. It is said that some industries that have been thus 
fostered for thirty, forty, or fifty years, are still as clamorous 
as ever for protection, and that they are no nearer going alone 
now than at the beginning. 



96 POLITICAL ECONOMY. 

5. The question is asked, "If restriction is "good as be- 
tween different nations, why is it not good between different 
communities of the same nation?" The United States is 
cited as a magnificent example of free trade over a large 
part of a continent, and of the prosperity and development 
which is consequent upon such a system. 

6. The last objection to be mentioned is, that it gives 
monopoly privileges. By this evidently is meant that it gives 
advantages to a few, which are denied to the many. The pro- 
tected industries are supposed to be favored, as has before 
been seen, at the expense of those not protected. 

3. It has been the design to present the arguments on 
both sides, as clearly and forcibly as possible with the Hmits 
at our disposal. Some of the arguments on both sides are 
specious rather than conclusive ; though, of course, different 
writers see in them severally different degrees of force. It is 
not improbable that much more stress has been laid upon 
the protectionist argument of the prevention of the degra- 
dation of labor, than belongs to it. While labor is better 
paid generally in the United States than in almost any other 
country, it is not therefore necessarily any more costly to the 
employer ; since the costliness of labor is estimated not so 
much by the amount paid for it as by its greater or less effi- 
ciency. We have already seen, that, while in England wages 
are higher than on the Continent, the same effect of labor 
costs less in the former than in the latter. So if we compare 
the European Continent with Southern Asia. Doubtless the 
same comparison will furnish analogous results as between 
this country and Great Britain. Still, if it be true that the 
unequal competition which would result under free trade 
prevents the development of industries for which a commu- 
nity has good facilities, the growth of capital would thus be 
hindered, and labor would be at a growing disadvantage. 



ARGUMENTS IN FAVOR OF FREE TRADE. 97 

4. On the other hand, there is some force in the objection 
to protection, that the success of free trade, as applied to 
the different parts of a great country hke the United States, 
would seem to indicate the propriety of applying it to the 
different communities of the world. There is, however, this 
difference, — that this country is, in an important sense, one 
community, having a common financial system, a common 
system of domestic commerce, and many other interests in 
common. For this reason it might seem that the policy 
demanded here is widely different from that applicable to 
nations in their mutual relations. 

5. There are two or three of the arguments against and 
objections to protection, that seem fallacious. The reason 
given in favor of free trade, that it is the method of nature^ 
is one of these. The theory is certainly very simple and 
natural. But it is said, simplicity and naturalness, if these 
terms imply the exclusion of art, do not by any means indi- 
cate superiority. If they do, we must give the preference to 
barbarism over civilization. All improvement and develop- 
ment involve the application of art and artificial methods. 
It is no argument against a system, that it is partly artificial 
instead of exclusively natural ; provided only that art shall 
work with nature, and not against it. In actual life, no one 
thinks of leaving nature to create industries or remove ob- 
structions. We have a good illustration of this in the fourth 
argument for free trade. Mr. Walker there supposes the 
case of two communities of diverse productive capabilities, 
but separated by a range of mountains which rendered com- 
merce impracticable. He has no hesitation in approving 
the building of a railroad to remedy this difficulty. He does 
not for a moment think of waiting for nature to do it, but 
would resort to art, and incur great expense, in order to bring 
the two kinds of producers into close proximity. 

8 



98 POLITICAL ECONOMY, 

6. One of the most popular and effective objections to 
protection is, that it is of the nature of a tax on other indus- 
tries. Yet it seems to me to be specious and fallacious. 
The assumption is, that the consumer pays for the protected 
article a price equivalent to that which it would be if there 
were no duty, plus the duty. As a matter of fact, there are 
very few instances in which this is really the case. It is true, 
that, in many instances, the price of a protected article will 
rise, and for a time continue higher, because of the duty im- 
posed. The idea of protection implies this : it is a sacrifice 
made in the present, for the sake of future advantage. Yet 
there are instances in great numbers where the price, instead 
of increasing, diminishes on the imposition of a protective 
duty. Nor is this any thing abnormal, but perfectly in ac- 
cordance with economical laws, as we shall see in a few 
illustrative examples. 

"Years ago," says Mr. Greeley, ''under a low duty, we 
imported most of the starch used in this country, making a 
little capriciously when the market, from whatever cause, was 
bare ; but soon a fresh importation would flood our ports, 
shutting up our starch-factories, and driving our workmen to 
find employment at something else. Of course they acquired 
no proficiency in the art, and our starch was undoubtedly 
inferior in quality to its imported rival. But the tariff of 
1842 imposed a duty of two cents a pound on imported 
starch ; and at once a leading house in this city [New York] 
resumed its long-suspended manufacture of starch, called in 
its scattered workmen, made a good article, and put it on 
the market half a cent per pound below the price previously 
ruling. This was done on purely business principles, because 
starch could be afforded for less in a large and steady 
market than in one contracted and capricious." 

The same effect was seen in the case of cotton fabrics. 



ARGUMENTS IN FAVOR OF FREE TRADE. 99 

The increased duties amounted to nearly one hundred per 
cent on importers' prices ; and, according to the theory of the 
objection under consideration, it should have nearly doubled 
the price. But instead of this, the prices in the LowqU manu- 
facturers' lists were lower by from one-fourth of a cent to a 
cent and a half per yard. It was for the same reason as that 
adduced in the case of the starch, — a steady and uniform 
market, occasioned by a restrictive duty, enabled the manu- 
facturers to produce cheaper than with the contrary condi- 
tions. 

The history of the Bessemer steel-rail manufacture in this 
country is another notable example. In 1864, there was no 
manufactory of this kind in this country : all the steel rails 
used were imported from England, and sold at a hundred 
and fifty dollars per ton in gold. There was a duty of forty- 
five per cent ad valorem. Certain parties interested in 
extending the use of these rails on our roads went to Eng- 
land to negotiate for the purchase of a quantity of them, 
but could make no more favorable terms than those above 
mentioned. Upon their return, a company was organized, 
works involving great expense were constructed, and work- 
men were imported. All this time the English rails were 
selling at ^150 to ^162. But the American product was put 
at ^130, when instantly the Enghsh article was offered at the 
same price, and, soon after, at ^120. Two years later, when 
the increase of the manufacture threatened to drive out the 
foreign article, the price of English rails was put at ^iio, 
and, soon after, at ^80. This was below the cost of pro- 
duction to our manufacturers, and their mills were in danger 
of being closed at an enormous loss of capital. At this 
point, fifteen of the consumers of steel rails petitioned Con- 
gress to increase the duty. Attention is called to the fact 
that these petitioners were consumers, persons interested in 



lOO POLITICAL ECONOMY. 

a diminution, and not in an increase, of prices ; and it was 
in this interest that they petitioned. They knew, that, if 
this competition were destroyed, prices would again rise ex- 
orbitantly. The request was granted, though only to the 
extent of about four per cent, but enough to secure the 
American enterprise from being overborne. Under the stim- 
ulus of this action, there has been an extraordinary develop- 
ment of the manufacture \ and the prices have constantly 
tended downward, till now steel rails are sold for about 
thirty-five dollars a ton. 

If it be said that much of this diminution comes from the 
improvements in methods of manufacture, this may be freely 
admitted ; and yet it is tolerably evident that a very large 
proportion of these improvements came from the establish- 
ment of the manufacture in America, and the sharp compe- 
tion occasioned thereby. It is also clearly evident that no 
such improvements took place, within two or three years, as 
to reduce the price from a hundred and sixty-two dollars to 
a hundred and five dollars. 

The same phenomena, though less marked, are found in 
connection with the protected manufactures of silk, of wors- 
ted, and many others, where prices have steadily declined, 
and almost in a ratio with the increase of the industry here. 
It is useless to say, that, in so many cases, this diminution is 
owing wholly to other causes. So many instances, and under 
such varied circumstances, would seem positively to indicate 
some common cause. 

7. The objection that protection causes a decrease of ex- 
ports is largely insisted on by many writers ; but there are 
many others who deny that it has any force. In the first 
place, it is said, if it were true that the protected country 
had no need of the goods from abroad, by reason of manu- 
facturing them at home, it would also have no need to send 



ARGUMENTS IN FAVOR OF FREE TRADE. 1 01 

its own products abroad ; since there would be, by the very 
fact before mentioned, all the larger demand for them at 
home. It is not necessary to import simply for the sake of 
importing, nor to export for the sake of exporting. But in 
the second place it must be admitted, that, after each nation 
has exhausted all its own facihties of production, there will 
still be many desirable things, which, if had at all, must be 
imported. It is also true again, that those communities which 
most largely and judiciously multiply their own industries, 
and thereby cultivate societary completeness, are the com- 
munities which have the largest variety of productions 
pecuHar to themselves, and hable to be wanted by other 
communities. Hence it is that those nations which have the 
greatest diversity of industries are those whose foreign trade 
is also the largest. It is in accordance with this principle, 
that we find, that, in the nations in which the protective 
policy prevails, the foreign trade, instead of diminishing as 
the objection assumes, increases more than in the unpro- 
tected, or slightly protected, countries. Take the United 
States as an example. In the decade from 1870 to 1880, 
under a tariff exceptionally high, and having many other 
exceptional features, — a tariff under which, if under any 
that was possible, the unfavorable effect under consideration 
should have been conspicuous, — we find that the exports 
increased from ^420,500,275 in value, to ^841,501,388, or a 
little more than a hundred per cent ; and the imports, from 
;^376,6i6,473 in value, to ^741,501,725, or a little less than 
a hundred per cent. 

Take the case of France. More than fifty years ago, the 
" Edinburgh Review," in an article on French industry and 
commerce, predicted, that, under the protective system then 
in operation there, the foreign trade of that country would 
be nearly ruined. During the decade in the middle of 



I02 POLITICAL ECONOMY. 

which this prediction was made, the exports of France av- 
eraged but Httle more than 500,000,000 francs. In 1854, 
about twenty-five years later, they amounted to 1,400,000,000 
francs, having nearly trebled. In 1874, France having then 
recently greatly increased her protective duties after a period 
of relaxation, her exports to Great Britain and Ireland alone 
amounted to 1,907,212,655 francs; being nearly three times 
the value of the British exports to France. 

8. It is undoubtedly the fact, that the protective system 
has been often perverted from its legitimate purposes, and 
that any tariff arranged with reference to this principle will 
operate with great inequality. This is also the case with 
every system of taxation. Still, in view of the arguments on 
both sides briefly presented, it seems apparent, that, to such 
a nation as our own especially, far more good than evil 
would come from a judicious application of the principle 
of restriction. That our present system is greatly imperfect, 
and that in many instances it is excessive, is not at all un- 
likely. But that the country would find advantage in the 
entire abandonment of the system, is vastly improbable. 



CHAPTER VI. 

THE INSTRUMENT OF EXCHANGE. 

1. Whatever aids in increasing the facilities of association, 
enhances the power of man over nature. The necessit}! 
of money as such a means is easily made manifest. The de- 
sign of commerce is, that each person, while producing but a 
single commodity, or, at most, but a very few commodities, 
may equitably avail himself of the many commodities that 
he needs. We have seen, that, though one man may pro- 
duce but one thing, he may produce enough of this to sup- 
ply a thousand persons. At the same time he may need a 
thousand things which he does not produce. Hence a 
thousand men find opportunity to minister to his support. 

2. The first exchanges in primitive times would naturally 
be by barter, each one exchanging the surplus of his own 
products for such surplus of others as he himself might de- 
sire. But the necessity of some other method would early 
evince itself. It would be found to be inconvenient and ex- 
pensive for the shoemaker who has made a dozen pair of 
shoes, to go with them to all the other producers whose wares 
he may just at that time particularly want. Even if the ex- 
pense could be in some way mitigated, there would be still 
other serious embarrassments. He might want a hat, but 
perhaps the hatter does not at that time want any shoes. He 
desires a coat ; but the tailor may only want a single pair of 

103 



104 POLITICAL ECONOMY. 

shoes, while an equal exchange would require six or seven 
pairs. Thus, to find purchasers of his own commodity among 
those whose commodities he desires in quantities corre- 
sponding to those of his desired by them, would be a pro- 
tracted and tedious business. 

A partial remedy for this inconvenience would be found 
in the agency of trade, — the establishment of places where 
all kinds of commodities would be taken by the merchant, 
and where within certain limits one would be reasonably 
sure to find whatever was desirable in return for products 
brought in. This might be further supplemented by book- 
account. But, greatly as these devices would abridge and 
expedite the business of exchange, it would be found that 
not only an agency is necessary, but also an instrument, — a 
medium readily receivable for all commodities, and in ex- 
change for which all desirable commodities would be readily 
taken. 



CHAPTER VII. 

THE PRECIOUS METALS. 

1. The great majority of political economists agree as to 
certain characteristics which should belong to any sub- 
stances used as the medium of exchange. The mere enu- 
meration of these indicates the reason why certain metals 
have been almost universally accepted for this purpose. 
I. It is said that the material should have value, aside from 
its use as money. 2. It should be generally uniform in 
value ; that is, the value should not be greater in one place 
than in another. 3. It should comprise much value in 
small bulk. 4. It should have some close approximation to 
constancy of value. 5. It should not be easily destructible. 
6. It should be divisible into small portions, which can be 
re-united without loss. 7. It must be of universal use. 8. It 
must be capable of receiving and retaining stamps and 
marks indicating its current value. 

These characteristics are attributed to gold and silver. 
I. They have a natural value, aside from that implied in 
their use as money. They are employed in the arts, though 
to a less extent than for the purpose of money. On this 
account, should either of them be demonetized to any con- 
siderable extent, the value would greatly diminish. 2. Being 
simple substances, and, in proportion to their value, easily 
transportable, it has been generally held that they were of the 

105 



I06 POLITICAL ECONOMY. 

same value in every part of the world. This, however, is 
denied by several eminent writers. It is not practicable to 
fully discuss this question, but I will refer to an authority or 
two. Professor Cairnes, one of the ablest of recent writers 
on political economy, in speaking of the doctrine that the 
value of gold is the same all the world over, says, " Now, if 
this be so, as the value of gold is merely another expression 
for the gold prices of commodities, it must follow that a 
high or low scale of general prices existing in any country, 
and not shared by every other, is an impossible occurrence. 
As there is no local value of gold, there can be no local 
scale of prices. I have no hesitation, however, in expressing 
my opinion that the doctrine in question, with whatever 
confidence advanced, is totally destitute of foundation." * 
Ricardo had some time before said, " The value of money 
is never the same in any two countries ; depending, as it 
does, on relative taxation, on manufacturing skill, the advan- 
tages of climate, natural productions, and many other 
causes." Other writers, while substantially admitting the 
truth of the above statements, claim that the variation is not 
of large amount. Yet obviously it must vary with the scale 
of general prices. 

3. That these substances comprise much value in small 
bulk, is sufficiently palpable. 4. It has also been generally 
held, that gold and silver are constant and uniform in their 
value. Yet it has of late been evident, that, with the vastly 
increased production of these metals, their value has greatly 
diminished : but this diminution, it is claimed, comes gradu- 
ally and through the lapse of years ; so that the change is 
scarcely appreciable within the time for which contracts are 
ordinarily made. Most writers regard them as far less vari- 
able than any other commodity which at present exists. It 

^ Leading Principles of Political Economy, etc., p. 408. 



THE PRECIOUS METALS. 10/ 

is highly probable, however, that far too great an estimate 
has been placed upon this supposed characteristic. It 
comes in part from the confusion of price with value. The 
price of all other things is their value expressed in money. 
The price of money is its value expressed in itself. In 
other words, there is no such thing as the price of money. 
Where gold and silver are the basis of money, they have no 
price. But their value ^ like the value of other things, is 
their purchasing power. Because they are made a standard 
of value, and because this value is always equal to itself, we 
are easily deluded into the belief that it never varies. 

Says M. Bastiat, an eminent economist of France, "A 
measure of length, size, and surface is a quantity agreed 
upon and unchangeable. It is not so with the value of gold 
and silver. This varies as much as that of corn, wine, cloth, 
and labor, and from the same causes ; for it has the same 
source, and obeys the same laws. Gold is brought within 
our reach, just like iron, by the labor of miners, the advances 
of capitalists, and the combination of merchants and sea- 
men. It costs more or less, according to the expense of its 
production, according to whether there is little or much in 
the market, whether it is little or much in request; in a 
word, whether it undergoes the fluctuations of all other 
human productions." ' Professor Fawcett holds that "The 
value of gold accurately varies in the inverse ratio of the 
prices of commodities. If the prices of all commodities 
rise one hundred per cent, the value of gold falls one hun- 
dred per cent ; for the same quantity of gold will exchange 
for, or purchase, only one-half as much of the commodity." * 

1 Essays in Political Economy (Putnam's translation) , p. i66. 

2 Manual of Political Economy, pp. 365, 366. There is a singular error in this 
statement, which it seems strange that such a writer should make. If prices rise one 
hundred per cent, gold falls fifty per cent. If it should fall one hundred per cent, its 
value would be nothing at all. 



I08 POLITICAL ECONOMY. 

5. These metals are among the most indestructible of sub- 
stances, and the wear and tear of them is inconsiderable and 
inexpensive. 

6. They are divisible into small portions, to suit the con- 
venience of users ; and can be readily re-united by melting, 
whenever desirable. In this respect they differ from dia- 
monds, which comprise even greater value in the same small 
bulk ; but when the latter have been once divided into frag- 
ments, they cannot be re-united. Another difference is, that 
gold and silver have a value proportional to their quan- 
tity ; while, in the case of diamonds, the larger are usually 
of proportionally greater value, — that is, a diamond twice as 
large as another may be of five times the value. 

7. Gold and silver are also of almost universal use, and 
can be transported from one country to another at slight 
expense. 

8. Finally, they are capable of receiving stamps and marks 
in the way of coinage, by which their character and value are 
indicatedo 

2. These characteristics of gold and silver have made them 
media of exchange from very early ages, even before men 
were fixed in permanent habitations. 

When and where coinage began, is not known ; but prob- 
ably it was somewhere in Western Asia, about 800 B.C. 
Though gold and silver are the most widely adopted media 
of exchange, they are not the only substances which have 
been used for this purpose : iron, cattle, wheat, tobaccOj 
shells, beads, the skins of animals, and other articles, have 
officiated in this capacity. 

3. The relation of government to money is a matter of 
some importance. It is to be observed, that gold and silver 
became the recognized instrument of exchange in the early 
civilizations, not by any arbitrary edict of rulers, but by the 



THE PRECIOUS METALS. IO9 

spontaneous consent of society, growing out of a general 
perception of their natural fitness for this office. But it by 
no means follows that government has nothing to do in rela- 
tion to it. Government must, for one thing, determine what 
shall be a legal tender; that is, what, when offered in pay- 
ment of a debt, shall be a legal discharge of that debt. A 
vital object of legislation is, to prevent uncertainty in the 
interpretation of contracts. Accordingly, it must prescribe 
what shall constitute the fulfilment of a contract, or a dis- 
charge of its obligation. Otherwise there might be conten- 
tion and costly litigation. Thus, one man owing another for 
a barrel of flour, the former might ofler to pay in oats, of 
which the latter is not just now in want ; or in glass bottles, 
which he will never want. Or the creditor might refuse to 
receive money of any kind, and demand some commodity 
difficult or impossible for the debtor to obtain. Government 
may prevent all liability to this trouble by determining, in 
cases where no commodity is designated, what shall be re- 
garded as a fulfilment of the contract. But it will, at the 
same time, leave the contracting parties free to designate 
any material as the medium of payment; and, when so 
designated, both parties will be held to the terms of the 
agreement. 

Government has also a function to exercise in determining 
the kinds of coins, their names, their weight, and the degree 
of purity of the metal ; what shall be the monetary unit, and 
the stamps and marks to be put upon the several pieces to 
distinguish them. It may also punish any corruption or 
counterfeiting of the coin. It must fix the monetary stand- 
ard, and determine whether it shall be one or the other, or 
both, or neither, of the precious metals. These have been 
regarded by most writers as the main functions of the gov- 
ernment in relation to money ; and it has generally been 



no POLITICAL ECONOMY. 

taught, that much beyond these it is not possible for the 
government to go without transcending its sphere. 

4. What shall constitute the monetary standard ? is a ques- 
tion open to some discussion. Three different standards 
have been in use in different modern nations, and at different 
times. Some have fixed upon gold, others upon silver, and 
others still upon both. As between gold and silver, the 
preference depends chiefly upon the stability of their respec- 
tive values, but subordinately also upon the convenience of 
handling. There is not only a difference among the several 
nations concerning the standard adopted, but the same na- 
tion has changed its standard, and sometimes more than 
once. Many years ago, Germany adopted silver : within the 
last few years it has changed to gold. In 1858, Holland 
adojDted silver, having previously had the double standard. 
She also has recently changed to the gold standard. What 
is called the Latin Monetary Union — comprising France, 
Belgium, Switzerland, Italy, and Spain — nominally adheres 
to the double standard, though the coinage of silver in all of 
them has been restricted, and for a time prohibited. Greece 
and Roumania have the same system, as do also Peru, Ecua- 
dor, and New Granada, in America. The single silver stand- 
ard is maintained by Austria and Russia, though in these 
countries specie payment has been for a long time suspended. 
Nearly all the vast population of Asia make silver the legal 
standard, as do several nations on the American continent, 
— about one-third of the inhabitants of the world alto- 
gether. 

Great Britain adopted the gold standard about sixty-seven 
years ago, — the first nation ever making the experiment. 
The same standard now exists in Portugal, Egypt, Turkey, 
the Scandinavian kingdom, a portion of South America, and 
the EngHsh colonies of Australasia and South Africa. Ger- 



THE PRECIOUS METALS, III 

many adopted gold about 1870, and the United States in 
1873 ; but the latter returned to the double standard in 
1878. In all these countries, silver is used as a subsidiary- 
coin, and is made a legal tender for a limited amount. 

5. The relative value of gold and silver varies from time 
to time. From the earliest period of which we have any 
record, — that is, from about 1600 B.C., — down to the be- 
ginning of the Christian era, they stood to one another in 
the relation of about i to 12 or 13, occasionally going up 
to I to 14, and once falling as low as i to 8.93. From that 
time to 1640 A.D., the ratio varied from i to 14.40 to i to 
10.50. Since 1640 it has never gone below i to 14, nor so 
high as I to 16 till 1872. The legal ratio adopted by the 
European governments for many years has been that of i to 
1 5 J. Since 1872, there have been marked variations in the 
ratio. For a while it increased greatly, at one time going 
as high as i to 22.54, though this was temporary. For most 
of the time it has been i to 17 or 18. 



CHAPTER VIII. 

CERTAIN DOCTRINES CONCERNING MONEY CONSIDERED. 

1. That money is not synonymous with wealth, is a prop- 
osition requiring little discussion. At this day, to most 
thoughtful persons, it appears like a truism. Yet, because 
in former times many wise men thought differently, and 
because some popular fallacies have grown out of the oppo- 
site doctrine, and are still extant, it is proper to give some 
attention to it. Some nations were so thoroughly imbued 
with this latter notion, that it became an important object 
of legislation, how to prevent any exportation of the precious 
metals ; such exportation being regarded as so much sub- 
tracted from the wealth of the country. The world has been 
some ages in learning that wealth consists not in money, — 
which is only an instrument for the exchange of those arti- 
cles constituting wealth, — but in the abundance of those 
things which command money. 

2. The value of the money in circulation in the commu- 
nity need be only a small fraction of the value of the com- 
modities exchanged through its instrumentahty. To most 
thoughtful persons, this will appear also as a truism. Yet we 
sometimes hear men reasoning as though the value of the 
exchanges made were somehow equivalent to that of the 
money used in making them. A familiar example will illus- 
trate the fact that a small sum of money will effect exchanges 

112 



CERTAIN DOCTRINES CONCERNING MONEY. II3 

involving many times its value. Suppose you are in want of 
a hat : you have five dollars, which you exchange with the 
hat-merchant for the article desired. The hatter pays it to 
a man of whom he has bought some wood. The latter 
buys with it a barrel of flour j and the flour-merchant gives 
it to one of his clerks, in payment for services. The clerk 
pays it for board to his landlady ; and she puts it with other 
money, to discharge her quarter's rent-bill. The landlord 
sends it to his son at school, who uses it to pay his tuition. 
Here are exchanges to the amount of thirty-five dollars, 
though but one-seventh of that amount of money has been 
used. Thus it is evident that the money requisite to effect 
the exchanges of a community equals in value only that of 
a small part of the commodities exchanged through its use. 
As we shall see hereafter, the exchanges made without the 
direct intervention of money are still greater in proportion 
to the amount of the medium in circulation. 

3. It is a commonly received doctrine, that the value of 
money is proportionally greater when its quantity is less, and 
vice versa. There is no doubt, that, as a general principle, 
this is true ; yet the proposition is not to be construed too 
rigidly, and it is practically subject to many modifications. 
There is very little doubt, that, in a state of society otherwise 
perfectly stationary, where previously there had \)Q^Ts.just the 
proper amount of money to furnish the best facilities for 
exchange ; where money was the sole instrument of exchange, 
and there was no resort to the mechanism of credit- transfers, 
— the introduction of a considerable addition to the amount 
of money in circulation would increase prices, while a sub- 
traction from this amount would diminish prices. 

The relation of the amount of money to general prices is 
affected by a variety of actual facts, some of which are 
pretty certain to be present in any state of civilized society. 
9 



114 POLITICAL ECONOMY. 

I. There is seldom just the amount of money in circula- 
tion that would furnish the most nearly perfect facility of 
exchange. It is impossible to determine how much is needed 
in any given case. But it is certain that some particular 
quantity meets the conditions better than any other. If there 
be either more or less than this, commerce will be unfavor- 
ably affected. It is the doctrine of a certain school, that, if 
a purely metallic currency exist, '' any amount is enough ; " 
since, it is said, prices will adjust themselves to that amount. 
A distinguished statesman illustrates this by saying, that, if 
a single yardstick can measure one piece of cloth, it can 
measure any number of other pieces. This is true ; but 
who would ever think of saying, that in a great dry-goods 
store, employing several scores of salesmen, " any number 
of yardsticks would be enough," since the business would 
adjust itself to the number? Evidently the number must be 
something more than a very few, or the business must suffer. 
If money is the instrument of exchange, there must be a 
certain ratio of the amount of money to the amount of 
exchange which is normal ; and any variation from this can 
but be in some degree disadvantageous. 

Suppose, that, in a nation where the amount of the circu- 
lating medium has been less than this normal quantity, by 
some means there is an increase. Now, no doubt, prices will 
rise. This will follow not merely because there is more money, 
but for other reasons as well. By the very hypothesis of there 
being too little previously, commerce was crippled, production 
was checked, labor was not fully or remuneratively employed ; 
and the purchasing-power of the whole community was thus 
diminished, making the demand even smaller than the sup- 
ply. The addition to the machinery of exchange would 
furnish a remedy for the depression : industries would revive, 
labor would be in demand, exchanges would be ready and 



CERTAIN DOCTRINES CONCERNING MONEY. II5 

quick, the purchasing-power of the community would be 
enhanced, and prices would rise. They would rise even 
without any addition to the stock of money, if, without this, 
these other conditions could have been secured. So that the 
increase of money causes the increase of prices, not merely 
by its own occurrence, but quite as much by the impulse its 
presence has given to business. We should find an equally 
clear illustration of the general principle in the case of a 
withdrawal of a portion of the circulating medium. 

2. Another factor to be regarded here is that of the per- 
petually increasing facilities of production. These diminish 
the cost of commodities, and consequently cause prices to 
fall. The multiplication of the appliances by which the 
forces of nature are now compelled to do the work formerly 
performed slowly and painfully by man, is patent to the com- 
monest observation. This very multiplication of production 
in proportion to cost would, of itself, tend to multiply ex- 
change, and, so far forth, would create a greater demand for 
money to facilitate the exchanges ; while, at the same time, 
the diminution of the cost of production would tend to 
depress prices. Hence, even if, other things being equal, 
the increase of money would enhance prices, the fact alluded 
to would wholly, and probably much more than, neutralize 
the effect. 

There is yet another modifying fact to be noticed. The 
influence of the increase of productive facilities is felt much 
more in manufactured articles and finished commodities than 
in coarse products and raw material ; so that while the for- 
mer, under conditions usually existing in civilized communi- 
ties, are continually growing cheaper, most agricultural and 
mining products, as also land and labor, tend to grow dearer. 
It is thus, as Mr. Carey has shown, that, in a prosperous com- 
munity, the prices of raw material and of finished products 
more and more approximate. 



Il6 POLITICAL ECONOMY. 

3. It is evident that commerce, or at least the desire to 
exchange in our modern communities, tends to increase 
more rapidly than metallic money. Hence the various de- 
vices by which the various forms of credit are made to fur- 
nish a large supplementary mechanism of exchange, — by 
means of book-account, bank-deposits, bills of exchange, 
drafts, checks, etc. As we shall see hereafter, much the 
larger proportion of the world's exchanges are effected in 
this way. These methods would be adopted to some extent, 
even if the abundance of coin were ever so great. But 
there are limits to their profitable employment, and those 
limits are more likely to be overstepped when the supply of 
currency is scanty than when it is abundant. 

It will be seen, from the foregoing considerations, that 
while money, like other objects of value, is subject to the 
law of supply and demand ; and while, all other conditions 
remaining the same, prices are inversely as the amount of 
money, — yet there are so many and such comphcated 
counter influences at work, that the rule is not only of little 
practical consequence, but it is sometimes false and mis- 
leading. Says Stephen Colwell, " The notion long prevalent, 
that prices were exactly adjusted to the quantity of currency, 
is shown to have long since exploded. Among the innumer- 
able influences which go to determine the general range and 
fluctuation of prices, the quantity of money is found to be 
one of the least effective." ' 

^ Ways and Means of Payment, p. 17. 



CHAPTER IX. 

THE CREDIT ELEMENT IN THE INSTRUMENT OF EXCHANGE. 

1. So far, the only money spoken of, except incidentally, 
has been gold and silver. The characteristics which have 
made them the almost universal media of exchange have 
been indicated. Yet it must be evident to the most superfi- 
cial observer, that, especially in recent times, they have con- 
stituted only a minor portion of the machinery of exchange. 
The chief reason for this is their limited quantity. More- 
over, the amount of them which would now be absorbed in 
making all the exchanges of the commercial world, would 
render them too costly an instrument. 

It is true that the production of these metals within the 
last few centuries, and especially within the last thirty-five 
years, has been very great. But great as has been the in- 
crease, the increase of demand for them would have been 
still greater but for the substitution of other devices. Be- 
sides the costliness of the material, even were there a suffi- 
ciency of it, the handling and conveyance of such vast sums 
as would at times be necessary, would be exceedingly incon- 
venient and expensive, if not at times impossible. 

2. The system of credit would easily suggest itself, not only 
as a matter of convenience in other respects, but also as an 
instrument of exchange. Let us take the following as an 
illustration. In a rural region, a farmer buys of the country 

"7 



Il8 POLITICAL ECONOMY. 

merchant from time to time, for a series of months, whatevei 
he may need for his family or his farm, — small groceries, 
cotton cloth, crockery, furniture, scythes, rakes, hoes, shovels, 
etc. ; with which he is duly debited. From time to time 
also he carries to the store, butter, eggs, cheese, apples, po- 
tatoes, wool, wheat, corn, etc. ; with these he is credited. 
At the end of the year the accounts are balanced, and what- 
ever difference there is — and ordinarily it would be small — 
might be paid in cash, or carried over to a new account. 
Thus exchange to the amount of several hundred dollars may 
be made, and only ten or fifteen dollars in money be used. 
Credit here in the form of book-account has been the instru- 
ment of exchange. It is to be noted, however, that refer- 
ence is had, in all these exchanges, to money as the measure 
of values. The pound of tea is debited, not as so much 
tea, but as one dollar ; the scythe and snath, not as such 
merely, but as three or four dollars, as the case may be. So 
the farmer is credited, not with the ten pounds of butter 
simply, but with three dollars ; and the thirty pounds of 
cheese is put down as five dollars. 

Now, let us suppose that the farmer, whom we will call A, 
has a balance of fifteen dollars in his favor in his settlement 
with the merchant, whom we may call B. A also settles with 
the blacksmith, whom we may designate as C, with whom he 
has an account of a similar character to that with B. Let 
us suppose that the balance here amounts to fifteen dollars 
against A. The latter may now give C an order on B for 
this amount. C takes it to B, who accepts it, and debits the 
amount to A. Possibly C may also have an account with B, 
and the balance against the former may be just fifteen dol- 
lars. In that case the amount debited to A on the accept- 
ance of his order will be credited to C ; and thus all three 
accounts, amounting perhaps to several hundred dollars, will 



THE CREDIT ELEMENT IN EXCHANGE. 1 1 9 

be settled, and all balances paid, without the use of any 
money. This is called a transfer of credit, and, as we shall 
see hereafter, is a very large element in the mechanism of 
exchange. The above is a very simple instance, and yet 
contains all that is essential to a system which is variously 
implicated, and extends to transactions involving the value 
of many millions of dollars. 

3. The following definition of credit is given by McCul- 
loch : " Credit is the trust or confidence placed by one in- 
dividual in another when he assigns him money or other 
property in loan, or without stipulating for immediate pay- 
ment. The party who lends is said to give credit ; the party 
who borrows, to obtain credit." The importance of credit, 
both as an instrument of exchange and as an aid to produc- 
tion, is very great. In order to production, as we have seen, 
a man must be able and wilHng to work, and there must be 
capital with which in some way he can unite his labor. The 
constituents of capital he must in very many instances bor- 
row of some capitalist before he can work to any advantage 
in producing means of his own to exchange for the capital 
needed. 

4. The advantages of credit may be briefly presented as 
follows : — 

I. To the capitalist. 

(a) Without a credit-system, each capitalist must keep 
all his means in his own hands, and thus incur the liability 
to extend his business beyond his ability to manage it. The 
limits of executive talent vary greatly in various men. Some 
can conduct the most extensive and complicated enterprises, 
involving perhaps millions of capital. Some, while able to 
earn fair or even large wages by their labor and skill, are yet 
incompetent to carry on even a small business of a simple 
character. Between these two extremes lie all the grades 



120 POLITICAL ECONOMY. 

of business ability. Hence there will always be men with 
more capital than they can manage, while others will be 
competent to manage more capital than they own. It will, 
then, be for the interest of the former to become the credit- 
ors of the latter, if they can do so with good security. 

(J?) Again, there are those who have considerable incomes, 
the surplus of which, above their expenditures, it is impossible 
to invest in their own business. Lawyers, physicians, literary 
men, teachers, artists, and many others are included in this 
class. Widows and children are often left with property 
sufficient for their support, if it can be properly invested; 
but they cannot usually carry on business themselves. If 
their property can be safely loaned, both they and the com- 
munity will find advantage in such a disposition of it. 

{c) Finally, as men advance in years, they are less capable 
of superintending an extensive business. It is natural that 
there should be a contraction, rather than an expansion, of 
their enterprises. In some cases it is necessary for them to 
altogether retire. In either case it would involve the with- 
drawal of a part or a whole of their capital, which must lie 
idle or be loaned. 

2. To the non-capitalist. 

(^) A man works with more interest, vigor, and success, 
where the enterprise is his own, than where it belongs to 
another. Then, too, he can adapt himself to his work as 
to time and circumstances, as he could not were he a mere 
journeyman. He will thus be likely to greatly enhance his 
production, both in quantity and quality. 

{b) Moreover, as we have seen, there are some men who 
have peculiar abilities of a high order for organization and 
management ; which abilities, without borrowed capital, can 
find no good opportunity for exercise, and will thus be lost 
both to their possessors and to the community. 



THE CREDIT ELEMENT IN EXCHANGE. 121 

{c) If each retains his own property as capital, there will 
be accumulations in a few hands and places ; whereas, with a 
wise credit-system, capital will be diffused more widely, and 
will bring th^ producer and consumer, as the capitalist and 
the laborer, into easier relations to each other. 

5. It thus clearly appears, that, by a judicious system of 
credit, the capital of a community gets more fully combined 
with labor, and production is palpably increased. It is to 
be recollected, that what is ostensibly borrowed and lent is 
money, but really it is material and ifnplemenfs. Thus a man 
desires to set up in the business of a blacksmith. He has 
simply the ability to labor, and the skill and intelligence, 
that fit him for his vocation. But he has no shop, no tools, 
no coal, no iron. If some one would lend him these, with 
the understanding that he might pay for them under stipu- 
lated conditions, and thus become their owner, it would 
answer all his purposes. Possibly in some cases this would 
be done ; but generally he would borrow the money with 
which to purchase these. 

These are only some of the forms and advantages of credit. 
It must exist to a greater or less extent in nearly all trans- 
actions of men with men. The employer must either trust 
his workmen with pay in advance, or they must trust him 
till the work is done. In countless ways it ramifies through 
society, and aids in all the affairs of commerce as well as in 
the production of wealth. Without it, society could scarcely 
advance beyond the condition of barbarism. It is the essen- 
tial element in all the great enterprises characterized by the 
combination and division of labor. In commerce, as in reli- 
gion, "we walk by faith, not by sight." But we have to do 
with it here chiefly as supplementing the precious metals in 
the function of an instrument of exchange. As we shall see, 
credit, in one form and another, constitutes the larger part 
of this instrument. 



CHAPTER X. 

BANKS AND BANKING. 

1. Banks are institutions which serve to abbreviate and 
faciHtate the business of exchange, by extending and render- 
ing available the credit of the community. Of general 
banking business in ancient times, we have only meagre ac- 
counts. It is more than probable that something answering 
to our present system existed in several nations previous 
to the Christian era. In modern times, among the earliest 
financial institutions of which we have any account, were 
the banks of Venice and Genoa, chartered, the former in the 
twelfth and the latter in the fourteenth century, and con- 
tinuing in operation till the beginning of the present century. 
The banks of Amsterdam and Hamburg began somewhat 
later, and are still in existence, having had a vast influence 
in the financial history of Europe. The Bank of England 
was created about 1692, and has been for more than a hun- 
dred years the most powerful factor in the commercial world. 
All of these institutions have been closely related to the 
governments of their respective countries. A multitude of 
minor banks have sprung up within the last two centuries, 
some of them of scarcely less note than those just mentioned. 
Banking is one of the most important occupations of our 
modem civilization. 

2. The beginning of the modern system was probably 



BANKS AND BANKING. \2% 

something in this way : In communities where there was a 
considerable variety of industry, and there were consequently 
many exchanges, there would necessarily be greater or small- 
er accumulations of money in the hands of individuals. It 
would be found inconvenient, hazardous, or expensive to 
keep these in one's own possession. A strong-box, perpetual 
watching, and manifold precautions might secure safety. 
But it would naturally occur to practical business men, that 
one strongly protected place, under the care of a competent 
person who should devote himself to the charge of the treas- 
ures of his employers, would be, at least, less expensive than 
each individual's custody of his own valuables ; and that it 
might be vastly cheaper, as well as more effective, for the 
whole community of business men to combine, and assign 
the guardianship to one man, than for each to exercise it on 
his own account. Hence would result a building, centrally 
located, with strong vaults, and other safeguards and secur- 
ities, where each person having surplus funds would deposit 
them for safe keeping. 

It would not take long to learn that only a part of the 
money deposited would be likely to be withdrawn at one 
time. Hence a portion might be loaned temporarily. Ex- 
perience and observation would furnish data for calculating 
how large this portion might be, and how much it would be 
necessary to keep constantly on hand. The part thus loaned 
on proper security, and made returnable at short intervals, 
would be paying interest ; which would be a compensation 
for the care of the money, and also afford a profit. Such a 
disposition of the funds would also be an advantage to the 
community, by keeping its capital more fully employed. An 
arrangement of this kind would have all the elements of a 
bank of deposit. 

3. We see that ardit appears as an important factor in 



124 POLITICAL ECONOMY. 

this department of banking. It has a wider scope even here 
than has been indicated. The primary and natural process 
would be such, that, whenever a man had money to deposit, 
he would carry it to the bank, and the sum would be placed 
to his credit. Whenever he desired to use a portion of it, 
he would draw such a portion, and be debited with so much. 
But an abridgment of this process would come early into 
use. The depositor, having a debt to pay, instead of going 
to the bank, and drawing the money, and then paying it over 
to his creditor, would give the latter an order on the bank. 
The receiver might do one of three things with the order. 
He might draw the money ; or he might deposit the order 
as so much cash, in which latter case there would be a trans- 
fer of credit from the account of the drawer of the order to 
that of its receiver ; or, without going to the bank at all, he 
might hand the order over, as so much cash, to some one 
with whom he has dealing ; and it might pass through several 
hands, paying as many debts, before finding its way to the 
bank, and even then being entered, up to the last holder's 
credit, without the use of any money. Usually, however, the 
order is carried to the bank by the party first receiving it, 
and is either paid in cash or placed to his credit. Such is 
the process of transfer of credits by checks. Much the larger 
proportion of the business of the banks and their customers 
in some communities is done in this way. Many wholesale 
firms in the cities receive most of their payments for goods 
in drafts ; they make their payments in the same way : so 
that comparatively little cash is used by them, though their 
transactions amount to thousands of dollars a week. Credit 
is thus made to greatly supplement money as an instrument 
of exchange. There is a still further development of this 
substituted agency, in the method of loan and deposit, which 
will be set forth hereafter. 



BANKS AND BANKING. 1 25 

4. So far we have been considering the method of pay- 
ment by transfer of credit, when there is only one bank in 
the community. But there may be more than one, and 
different individuals may be doing business with different 
banks. Let us see how payments may be made without 
money in such cases. Suppose, in a large village, A makes 
his deposits in one bank, and B in another. A receives in 
payment of a debt, or in exchange for goods, a check on 
the second bank. Instead of drawing the money from that 
bank, he puts it, with other drafts and with cash, in the first 
bank, where he makes his deposits ; and the whole is cred- 
ited to him as so much money. B may also receive a check 
on the first bank, in the way of exchange : this check he will 
deposit in the second bank, where he does business. What 
these men do, a score or a hundred others may do. Thus 
there may be in each of these banks, or in each of half a 
dozen if there be so many, a number of checks upon each 
or all of the others. At the end of the day or of the week, 
each bank settles with every other, exchanging checks, and 
paying balances in money, or passing them over to a new 
account. Usually this balance is comparatively small, so 
that here again is an abridgment of the use of money by 
credit on a large scale. 

5. In large cities, there are institutions called clearing- 
houses, for faciUtating the settlement of checks and drafts 
between banks. They are of recent origin, but have already 
grown to be among the most important of financial agencies. 
Only a brief description of them can be given. 

The clearing-house is a room where the several banks of 
a city send their representatives with the checks and drafts 
which each has on any of the others. We have already 
seen how one bank comes into possession of checks drawn 
on another. There are certain officers and employees of 



126 POLITICAL ECONOMY, 

the clearing-house, who keep a record of the accounts 
between the several banks ; and the work is thoroughly 
systematized. Each bank, before sending in its checks, 
assorts them in several parcels corresponding to the banks 
upon which they are drawn. On arriving at the clearing- 
house, the clerk presents them respectively to the several 
clerks of the clearing-banks. These checks have already 
been entered on the "out-clearing book; " that is, debited 
to the several banks on which they are drawn. Each bank- 
representative, on receiving the checks against his own bank, 
has them entered in the " in-clearing book." Opportunity 
is given for each bank to reject any checks which it does 
not see fit to pay ; and, after all rectifications are made, each 
clerk reckons up the claims against his bank, and compares 
the amount with that in the out-clearing book, which indi- 
cates what is due from the other banks to it. The differ- 
ence is the balance which this particular bank is to pay or 
receive, as the case may be. These balances are reported 
to the officers of the clearing-house, and inserted in a kind 
of balance-sheet. The two sides should exactly balance, 
since whatever is received by one bank must have been paid 
by another. Of late, in London it has been the custom to 
pay the balances, not in cash, but in checks on the Bank of 
England, where each City bank ordinarily has an account. 
Thus transactions to the amount of $100,000,000 a day are 
settled without the intervention of any money at all. In the 
New-York clearing-house there have been exchanges effected 
in a single year to the amount of nearly 1^34,000,000,000, 
with cash balances of less than $1,500,000,000, or less than 
four per cent. That is, four dollars are made to do the 
work, which, without these agencies, it would require one 
hundred to accomplish.' 

* See American Cyclopaedia, article " Bank ; " also, Jevons's Money and the Mech 
anism of Exchange. 



BANKS AND BANKING. 12/ 

6. It is both curious and interesting to trace the process of 
exchange between remote parts of the same country or be- 
tween different countries, and observe how large a proportion 
of it is effected by transfers of credit. Thus a man in Mil- 
waukee consigns a thousand bushels of wheat to a firm in 
New York. He draws on that firm for one thousand dollars 
at ten days' sight. This is done, say, through the First 
National Bank of Milwaukee, which sends the draft to its 
correspondent bank in New York, say the Columbian Bank. 
The consignee pays the draft by a check on the Union 
Bank. The check finds its way to the clearing-house, where 
it is met by counter- checks, as we have seen; but the 
amount is credited by the Columbian Bank to the First 
National in Milwaukee, which in turn credits the same, less 
exchange, to the consignor of the wheat. 

In the mean time another man in Milwaukee has ordered 
five hundred dollars' worth of carpeting from New York ; and 
another, three hundred dollars' worth of boots and shoes ; 
and still another, two hundred dollars' worth of cotton cloth. 
If these three persons all do business at the First National 
Bank of Milwaukee, they will, when their bills become due, 
deposit the amount of the same in this bank, which will give 
them drafts on the Columbian Bank of New York, and these 
will be sent to the parties in New York, to whom the bills 
are due; and the latter will deposit them in the banks 
where they do business. The drafts will come in due time 
through the clearing-house to the Columbian Bank, which 
will debit the several amounts to the First National in Mil- 
waukee. Now there will be in the same bank a credit of a 
thousand dollars on account of the wheat received from 
Milwaukee, and a debit of a thousand dollars for the goods 
sent from New York. One amount offsets the other ; and 
the wheat pays for the carpeting, cotton cloth, and boots 
and shoes. 



128 POLITICAL ECONOMY. 

It is very likely that the different buyers and sellers in 
Milwaukee may do business in different banks, each of which 
has a different correspondent bank in New York. The pro- 
cess in this case is more complicated : but even so, a very 
large proportion of these drafts and bills are met by other 
paper of the same kind, in some of the money-agencies 
East or West ; so that, for the most part, the Western prod- 
uct pays for the Eastern merchandise. Of course more or 
less money passes back and forth, when the bills of exchange 
fail to meet ; but the actual amount of cash used is very 
small in comparison with that of the business done. The 
same general features of the system of exchange by means 
of credit exist in international trade. 

7. There are four kinds of banks, which it was my purpose 
to describe ; namely, banks of deposit, savings-banks, banks 
of discount, and banks of issue or circulation. Sometimes 
these are all combined in one ; and generally, in this 
country, the functions of three of them are performed by 
one institution. I have already described banks of deposit. 
Before going on to consider the banks of discount and cir- 
culation, which are closely connected with the former, let us 
see what is meant by a savings bank. 

A savings bank is an institution in which small sums of 
money are deposited from time to time, as they accumulate 
in the hands of persons of small incomes and moderate 
earnings. The depositors are credited with these sums, and 
receive a certificate, usually in the form of a deposit-book. 
They are allowed a moderate amount of interest in any 
case, and an additional amount contingently. The bank 
loans out the money thus deposited, to trustworthy persons, 
in large sums, the rate of interest being somewhat higher 
than that regularly paid to the depositors. The benefit of 
such an institution is twofold. In the first place, there are 



BANKS AND BANKING. 1 29 

many persons who have moderate sums of money, or property 
convertible into money, which they desire should be earning 
something in some safe place. The amount, by itself, is too 
small to be loaned to advantage. Such persons are not 
likely to know how, even if the sums at their disposal were 
sufficient, to find the best investment, or to determine con- 
cerning the security offered. But put in the hands of men 
who make this their business under rules devised by the 
best financial talent of the community, and who can com- 
bine these small sums, and invest them to the best advantage, 
it is made both safe and profitable for small capitalists. 

In the second place, there are many who wish to unite 
their labor and skill with capital in some productive enter- 
prise, and, having no capital of their own, desire to borrow. 
They do not always know the persons who have money to 
loan. The savings bank gives them an advantage which they 
would not otherwise have. It is thus a double benefit : first, 
to those who have some surplus, but would be unable to loan 
it to advantage ; and, secondly, to those who are in want of 
capital, but would not know where to find it. 

8. Banks of discount and loan are frequently combined 
with banks of deposit, though not necessarily so. They are 
usually constituted as follows : A charter from the Government 
is secured, reciting the privileges of the institution, and speci- 
fying the conditions to which it must be subject, its respon- 
sibilities, and the amount of capital required. This capital 
is divided into a certain number of shares. When the char- 
ter is secured, the books are opened for subscribers to the 
stock, of which some take more and some fewer shares. 
Each shareholder has a voice in the choice of directors, in 
proportion to the number of shares held by him. When 
the bank is organized, each stockholder pays in the amount 
subscribed by him. Under a specie-basis system, this is paid 

in silver and gold. 
10 



130 POLITICAL ECONOMY, 

The principal functions of such a bank are exchange, dis- 
count, and loaning ; all, as will be seen, being devices for 
systematizing and utilizing the credit of the community. Of 
the character of exchange, we already have some notion. 
Certain banks in different countries, or in remote parts of 
the same country, are in correspondence, and have accounts 
with one another. If a person in the vicinity of one of these 
banks wishes to pay a bill due in some distant place, he goes 
to the bank near him, and purchases a draft on some bank 
in a large central city, with which the local bank is in corre- 
spondence. This draft is sent to the creditor, who will 
doubtless deposit it in the bank with which he does business, 
where it will be paid, or its amount credited to him. It will 
sooner or later find its way, through other banks and the 
clearing-house, to the bank upon which it is drawn. This is 
the simple form and operation of a bill of exchange, but the 
process is often much more complicated. By reason of the 
correspondence of the country banks with those of the great 
commercial capitals, and of the latter with one another, a 
man in Mississippi may pay a debt in Ohio by a draft on 
New York ; and a debt in Brussels or Geneva may be paid 
by a bill of exchange on London or Paris. 

A partial notion of discount and loaning may be gathered 
from the following illustrations. When a wholesale merchant 
sells a quantity of goods to a customer, he may make out a 
bill payable in thirty, sixty, or ninety days, which the cus- 
tomer accepts, and thus binds himself to pay at the time 
stipulated. This bill, indorsed by himself, the wholesale 
merchant deposits in the bank with which he does business, 
and is credited with the amount of the bill, less interest for 
the time it is to run. A bill thus disposed of is said to be 
discounted. Somedmes a note is given by one person, and 
indorsed by another, and offered at the bank. If accepted, 



BANKS AND BANKING. 131 

the amount is either paid over in money, or placed to the 
credit of the borrower. The interest is either paid when the 
note becomes due, or is deducted from the amount loaned 
in advance, usually the latter ; and thus the term discount is 
used with reference to both kinds of transactions. 

9. Before indicating further the operation of a bank of 
discount, it is desirable, since the two are ordinarily united, 
to describe a bank of issue or circulation. We have seen 
that the stock or capital of a bank, as banking is usually 
conducted on a specie basis, is supposed to consist of me- 
tallic coin. But as this would be inconvenient to carry 
about in large amounts, and as it is subject to much risk, the 
bank, instead of loaning its coin, loans its own notes, paya- 
ble in specie on demand. As only a few persons would pre- 
fer specie to paper, as long as the latter will command the 
specie, the banks usually keep on hand only a certain pro- 
portion of the capital for the redemption of the notes, even 
though the notes in circulation call for an amount equal to 
the whole stock of the bank. The remainder may be so 
invested or loaned as to be earning a profit for its owners. 
That this usage has been sometimes grossly abused, is true ; 
and in some parts of our country it has made banking a 
fraud, and a farce of the most disastrous character. A bank 
constituted as above indicated, and combining the three 
functions named, may loan and draw interest on its loans in 
three ways : (<3:) it may loan the larger part of its capital ; 
{b) it may loan a considerable proportion of its deposits; 
{/) it may loan its own promises to pay, to the extent of 
half or two-thirds of its capital. 

10. It is evident that banks deal not merely in money, 
but also in debts and credits, and in these latter to a much 
greater extent than in the former. A little further examina- 
tion will make this clear. Sir John Lubbock, a noted Eng- 



132 POLITICAL ECONOMY. 

lish financier, gives an analysis of a sum of ;^i 9,000,000, 
paid into his banking-house in the city of London. It was 
composed of — 

Checks and bills ...... ;^i8,395,ooo 

Bank-notes 487,000 

Coin •••. 118,000 

;/^ 1 9,000,000* 

Here it will be seen that only a little more than three per 
cent of the transactions of the bank involved the use of any 
kind of money, and only one-fifth of that money was coin. 
In an ordinary country bank, or even in a bank of almost 
any city of moderate size, the proportion of money used will 
be considerably greater than this ; but, in any case, it will 
constitute only a small part of the business. 

It is not to be inferred that banks can be made to sub- 
stitute the instrumentality of money altogether. They con- 
stitute an agency through which wholesale dealers, capitalists, 
employers, and men engaged in extensive enterprises, can 
manage their exchanges with comparatively little money. 
But men in moderate circumstances — small farmers, mechan- 
ics, and inhabitants of sparsely settled regions — must make 
a much larger proportion of their exchanges by means of 
money. Hence a real scarcity of money may be a far greater 
misfortune to the latter classes than to the former. 

* Jcvons's Money and Mechanism of Exchange. 



CHAPTER XL 

THE PAPER CURRENCY OF THE UNITED STATES. 

1. The system of banking created by our General Govern- 
ment during the time of the civil war differs somewhat from 
that which previously existed, and which has been already 
described. In the first place, under the former system the 
banks were chartered by the legislatures of their respective 
States. This may still be the case ; but the General Govern- 
ment now imposes on the circulation of the State banks a 
heavy tax from which that of the National banks is exempt. 
The result has been what it was intended to be ; namely, to 
discourage all circulation except that of the National banks or 
those chartered by the General Government. 

In the second place, all the notes of the National banks are 
guaranteed, as to their ultimate redemption, by the Govern- 
ment, and yet not at its risk. Every banking association 
must, at its organization, deliver to the United-States treas- 
urer interest-bearing bonds of the Nation, equal in value to 
two-thirds of the capital. It is then furnished by the comp- 
troller of the currency with circulating notes of various 
denominations, in blank, equal in amount to ninety per cent 
of the current market-value of the bonds deposited, but not 
exceeding the par value of such bonds. In any case of the 
failure of the bank, there is no risk of loss to the holders of 
its notes, as they are good for the face of them at the United- 

133 



134 POLITICAL ECONOMY. 

States Treasury. The Treasury also incurs no risk, as it has 
in its possession securities of the bank to something more 
than the extent of the whole circulation, in the form of 
United-States bonds. The bank loses nothing by depositing 
these securities, since the Government is paying the interest 
on them. 

It is this feature, with one other soon to be mentioned, 
which gives the notes of these banks the character of a 
truly national currency. The bills of a bank in Minnesota 
or Texas are just as acceptable in New York or in Maine as 
the bills of the banks of the latter States. Under the old 
system, a bank-note in most of the States could hardly cir- 
culate out of the vicinity of the place of its issue. This was 
the source of endless annoyance to a traveller, and frequently 
of expense by way of exchange. 

In the third place, these National-bank notes are a legal 
tender in the payment of all dues to the United States, except 
import duties ; and also for all dues from the United States, 
except interest on the public debt. But they are not a legal 
tender for private dues. 

Again, the National banks are required to keep on hand, 
for the redemption of their notes, a certain proportion of 
" lawful money." This proportion differs in different places. 
Sixteen of the principal cities are designated, in which it is 
fixed at twenty-five per cent. Elsewhere it is fifteen per 
cent. 

I have given the main features of the National-bank system 
as distinguished from that of State banks which existed pre- 
vious to the civil war. That the former is a very great 
improvement on the latter, there can be no question. That 
it has its imperfections, is undoubtedly true. 

2. Besides the National-bank notes, Government notes 
have, for something over twenty years, formed a large part of 



PAPER CURRENCY OF THE UNITED STATES. 1 35 

the instrument of exchange. The " greenback," popularly 
so called from the color of the ink with which the back is 
printed, is a promissory note of the United- States Govern- 
ment, drawing no interest, and made by law a legal tender for 
all dues except duties on imports and interest on the public 
debt. These notes began to be issued early in the time of 
the civil war. The national treasury was empty, the banks 
had suspended specie payment, industry everywhere was 
paralyzed ; immense sums of money were needed to supply 
the implements and munitions of war, and the sustenance, 
clothing, and equipment of the soldiers ; and it was impos- 
sible instantly to effect a loan, such as would enable the 
Government to meet the demands upon it. It was a des- 
perate emergency, and required bold and decisive, if not 
desperate, action. It was not without precedent for a Gov- 
ernment to issue its own promises to pay, though with the 
understanding that the fulfilment of the promise must be 
indefinitely postponed, and to make these a legal tender 
constituting them a part of the " lawful money " of the 
nation. They became, and still remain, a part of the debt 
incurred by the war. 

The danger incurred by this measure was the same as 
that usually pertaining to the issue of inconvertible paper 
by Government. There is a tendency to increase the 
amount till we have what is called an inflated currency ; 
that is, an amount of paper currency which is greater than 
the commercial demand. This raises prices, and other- 
wise produces irregularity and unsteadiness in the markets. 
Under such conditions we have what is known as a de- 
preciated currency, that is, a currency below the par of 
gold and silver. This took place in this case. At one 
time a gold dollar would buy two and one half dollars in 
greenbacks. This was not, however, as is sometimes repre- 



136 POLITICAL ECONOMY. 

sented, altogether the result of over-issue. It was the un- 
certainty of the issues of the war, and therefore of the 
credit of the Government. Later, when the issues had 
been increased to a still greater extent, the gold premium 
had greatly diminished and steadily declined till the time 
when, by law, the notes were redeemable in specie. This 
kind of currency is still in use, though the amount issued 
is strictly limited, and cannot be legally increased. 

3. The advantages of a paper currency are numerous 
and important, but they may be grouped as follows : — 

1. Paper is more convenient than specie for handling 
and carrying. A hundred dollars in silver, or a thousand 
in gold, could be carried about the person with neither 
ease nor safety. 

2. The wear and tear of specie would be much more 
costly by constant use than that of paper. 

3. It forms a supplementary currency which is of vast 
advantage to a community. Were all the exchanges to be 
made through the medium of coin, without the intervention 
of credit in the form of paper, commerce would be greatly 
impeded. There is not enough gold and silver in the com- 
mercial world to answer this purpose. The financial his- 
tory of the modern world shows this. Hence the necessity 
of credit, which, in civilized nations, performs far more of 
the functions of an instrument of exchange than gold and 
silver. A considerable part of this credit element consists 
of what we have called paper money. 

It is generally acknowledged that the first two advan- 
tages mentioned above constitute valid reasons for the use 
of paper money. But the third is rejected by a certain 
class, on the ground that bank-notes should never be used 
to supplement coin. This class holds that only so much 
paper money should be issued from the banks, or any other 



PAPER CURRENCY OF THE UNITED STATES. 1 37 

source, as is equivalent in the amount promised to the 
amount of coin actually on hand by the issuer ; so that, if 
all the notes were presented at one time, they could be 
redeemed at once. This would, of course, make the bank- 
notes of no advantage whatever as a supplementary cur- 
rency. It is claimed, on the other hand, that these notes 
are entirely safe under careful regulations, where not less 
than one-third as much coin is kept on hand as the notes 
called for. 

The evils of paper money are found chiefly in the liabil- 
ity to an expansion and contraction of the currency, the 
power of which is largely in the hands of the managers of 
the banks, or, in the case of governmental notes, under the 
direction of the national legislature. Such fluctuations are 
productive of serious disasters to commerce, and to all the 
interests of industry. 



CHAPTER XII. 



TRUSTS. 



1. Corporations are combinations of individuals for 
productive and commercial purposes. They are a com- 
paratively modern device, and as an important element in 
the industrial and commercial world, date back scarcely 
so much as a century. But their development has been 
rapid, and they now control a large part of the capital of 
the world, and are the employers of a very large propor- 
tion of its labor. Very recently there has appeared a new 
form of combination, popularly known as " trusts." They 
are combinations of corporations, as corporations are com- 
binations of individuals. The primary objects of these 
combinations are (a) to diminish the cost of production ; 
(d) to limit production, and thus affect prices; (^) to fix 
prices by the arbitrary determination of parties constitut- 
ing the combination. 

2. The industrial experience of recent times has pretty 
fully demonstrated the proposition that production on a 
large scale is much more effective than on a small one. 
Ten small factories of ten thousand dollars capital each will 
not produce so much, nor at so small a cost, as one of a 
hundred thousand dollars capital. In the latter case there 

^ This chapter, perhaps, might have better come in under the head of Production, 
but as the principle in the subject is the effect on prices, it is not out of place here. 



TRUSTS. 139 

is likely to be more efficient machinery, less proportional 
superintendence, greater advantage in the purchase of 
material, as well as some other advantages not found in 
the former. Now, in the case of a trust, it is not likely 
that any large proportion of the separate enterprises would 
be given up in order that the capital and labor might be 
concentrated in the larger ones ; but some of them, at least, 
would cease to produce, and some of the larger ones would 
be united under one management. 

3. But this is not the main method by which the cost 
of production is expected to be diminished through these 
combinations. One of the leading and avowed objects 
sought in the formation of trusts is the doing away with 
what is regarded as excessive competition. It is not 
many years since it was universally taught by orthodox 
political economists that competition was the great regu- 
lator of prices, of wages, of profits, and of some other 
things. It was regarded as the great balance wheel in the 
industrial and commercial system, and to interfere with its 
operation would introduce disorder, and be contrary to 
the public welfare. Recent investigations, however, have 
shown that the functions attributed to it, while within cer- 
tain limits they are actual and legitimate, beyond these 
limits are unduly extolled. Not only are there groups of 
industries between which there is no opportunity for com- 
petition, but even within the several trades, where it would 
seem to have its legitimate office, it is carried to such ex- 
cess as to greatly increase the cost of production. Take 
the present system of advertising as an illustration. Here 
are hundreds of manufacturers of the same commodity try- 
ing to recommend their particular wares. Millions of dol- 
lars are expended, which but for this fierce competition 
would remain with the producer, making the cost of pro- 



140 POLITICAL ECONOMY. 

duction so much the less. But this is only a part of the 
expenditure thus incurred. Each firm and corporation 
must have its agents and commercial travellers, whose busi- 
ness it is to commend the goods of their principals, and 
secure purchasers for them. These and other measures 
resorted to are items of vast expense involved in the in- 
tense competition now existing. Nearly all this expense, 
as well as much other outlay, is avoided when all the pro- 
ducers of a particular article enter into a combination of 
the kind we are considering. The cost of advertising is 
reduced to a minimum, the commercial agencies virtually 
cease to exist, and other expenditures fall off. So far 
there would seem to be some reasonable ground of justifi- 
cation for the " trust." Under its operation the cost of 
production is greatly diminished, and consequently prices 
would noticeably greatly diminish. But here self-interest 
appears as an element modifying the conditions. This will 
appear more fully later. 

4. A second object in the formation of trusts is to limit 
production, and so affect prices. Under the system of 
unrestrained competition, each corporation seeks to sup- 
ply as much of the market as possible. Thereon sequence 
is that there frequently comes to be an over-supply of the 
particular commodity, and occasionally a depression of 
prices below the cost of production. Under the trust, pro- 
duction can be limited to any extent. But while it might 
be a real and great benefit to the community to limit all 
production, so that the supply would not exceed the de- 
mand at prices corresponding to cost of production, the 
combination is under no restriction to stop at that point. 
In the absence of competition production may be limited 
to any extent, and thus prices be enhanced by the very 
smallness of supply. This clearly would be detrimental 
to the interests of the community. 



TRUSTS. 141 

5. There is evidently power in such combinations to fix 
arbitrarily the price of their goods ; and there is no limit 
to the exercise of this power except inclination or self- 
interest. That they would have occasion to determine 
prices except in the method described in the preceding 
paragraph is doubtful, but it is not necessary to presume 
that by either of these methods prices will ever actually 
become extortionate. They are very likely to rule higher 
than those corresponding to the cost of production, but 
even self-interest would furnish a limit to prices thus de- 
termined. In the case of most commodities, if the price 
rises above a certain point, there is certain to be a falling 
off in the demand ; and this is very likely to be so great 
that the sale at the higher price would be less profitable 
than at a lower. 

6. It thus appears that these gigantic combinations, 
while they remedy the evils of inordinate competition, and 
greatly reduce the cost of production, and so far at first 
add to the wealth of the community, do not permit this vast 
increment to inure to the benefit of society at large, but 
reserve the whole surplus to enrich the stockholders and 
proprietors. Enormous fortunes have been accumulated 
by individuals, while prices generally are not so low as 
before. 

7. It was assumed by orthodox economical authorities, 
in the earlier part of this century, that self-interest fur- 
nished the motive-power in all industrial and commercial 
enterprises, and that this was sufficiently limited by free 
competition. Thus, if certain persons were engaged in 
an industry in which the rate of profits was greater than 
enough to induce men to engage in business, others would 
make haste to engage in the same business, and thus, by 
greatly increasing the product, reduce prices and profits 



142 POLITICAL ECONOMY. 

to the normal rate. If, on the other hand, it was found 
that any occupation paid less than the current rate of 
profits, a portion, at least, of those engaged in it would 
abandon it, and choose something else. In this way the 
supply would be reduced, and prices and profits would 
rise. This is true to a certain large extent, within a large 
range of instances, but it does not hold universally. As 
we have seen, competition may become excessive, and in- 
stead of being a perfect regulator of prices and profits, it 
may be a source of wasteful expenditure. But clearly the 
remedy does not lie in the suppression of competition, and 
the giving of self-interest sole control. The moral charac- 
ter of no considerable portion of our race has reached that 
stage of development that it will be safe to put the inter- 
ests of the whole community under its direction. 

8. What measures should be taken to remedy the evils 
involved in trusts, it is yet too early to determine. Some 
of the more radical of our thinkers assert their conviction 
that they should be taken out of the hands of private bodies 
of men, and be assumed by the Government. This would 
be socialism^ and our communities are evidently not yet 
prepared for that. It is highly probable that some way 
will be devised by which Government will so restrict them 
as to prevent the evils with which they now affect and 
threaten society. 

9. It should be stated that a trust cannot be effectual, 
in at least many cases, unless it can get control of the 
material on which production depends. Otherwise other 
combinations are possible, and competition comes once 
more into operation. Distinction ought also to be made 
between certain great combinations, as, for instance, those 
of the great trunk lines of railways. These are not trusts, 
for the reason that a trust must take in substantially all the 



TRUSTS. 143 

corporations engaged in the same kind of business. These 
railway combinations do not embrace the whole railway 
system of the country, nor even all of those roads doing 
business between the same points. Hence competition is 
not destroyed, though its excessive operation is so reduced 
that much expense is saved, and the whole community 
benefited. By means of these combinations freight has 
been reduced more than one-half between the East and 
West. The Western farmer now receives more for his 
wheat and flour because of this consolidation, while the 
Eastern consumer gets it for less. Thus both producer 
and consumer are benefited, while the corporations have 
gained great profit. 



BOOK FOURTH. 



DISTRIBUTION. 



CHAPTER I. 

GENERAL STATEMENT. 

1. By distribution is meant the determination of the pro- 
portion of the value of any product to which each contribu- 
tor to that product is entitled. In such a determination many 
considerations are involved. There are the various kinds 
of labor, such as physical and mental, common and skilled, 
the more and the less efficient ; together with such modi- 
fications of these as are impUed in their being mingled in 
different proportions, and in the experience, aptitude, and 
culture of individuals. 

Let us take some one product, — say this table, — and 
consider the number of laborers and the variety of labor 
contributing to its production. Those who transformed the 
lumber and other materials are only a very small proportion 
of these contributors. There are also those who manufac- 
tured the lumber, those who cut the logs out of which it was 
made, and those who hauled them to the mill ; the makers 
of the nails, and of the iron from which the nails were made \ 
the miners who got out the ore, and the transporters of the 
same ; the painter, the producers of the paint and the oil, and 
all that lies back of this ; and, in addition, the maker of all 
the tools and machinery used m all these operations ; and 
much else that we cannot specify. Evidently the three or 
four dollars, at which the completed table is valued, must be 

147 



148 POLITICAL ECONOMY. 

distributed among, perhaps, two or three scores of persons 
who have had a hand, directly or indirectly, in its produc- 
tion. The question is. How shall we equitably apportion this 
amount among these several parties ? 

2. The most natural answer to this question would 
undoubtedly be, that each individual engaged in the pro- 
duction of a valuable commodity is entitled to an exact 
equivalent of the value by him produced. If it were simply 
estimating the respective shares of several laborers of about 
equal ability, it would be a very easy matter. If it related 
to several laborers differing only in physical strength and 
skill, it might be clearly within the ordinary powers of com- 
putation. The problem might be calculable, even if we had 
to take into account certain differences of intellectual com- 
petency ; but when we remember that not only are all these 
elements, and many more pertaining to personal labor, to 
enter into the question in countless complications, but that 
capital, in a vast variety of forms, comes into co-operation 
with all productive effort everywhere, then the situation is 
seen to be environed with many and great difficulties. 

3. The following is the general division of the subject : — 

1. Wages, or the compensation of labor. 

2. Profits, or the compensation of employers and propri- 
etors. 

3. Interest, or the compensation for the use of capital, 
reckoned as money. 

4. Rent, or the compensation for land. 

5. Taxes, or the compensation for the services of the 
government. 

The term " compensation " is not used with scientific pre- 
cision, and may mislead. It is simply intended to signify the 
shares to which the several co-operating parties are entitled 
■by reason of their relations to the product. It is not neces- 



GENERAL STATEMENT. '49 

sary to suppose that these different kinds of compensation 
a^alwardistributed to as many different part.es. For 

: tate^a farmer, especially '^^ '^^^^^^^^^Z^^ 
farm free from debt. What might otherwise be mterest and 
rent, now becomes scarcely distinguishable from profit. He 
mav also be his own hired man, and so receive the wages 
S he would otherwise pay to another He manages an 
owns his stock and entire capital ; and thus all the produc^ 
Tept the share due the government, is properly taken by 
himself. 



CHAPTER II. 

WAGES : GENERAL VIEW. 

1, Though wages have been represented as the compen 
sation for labor, the term has, in ordinary usage, a somewhat 
more limited signification. It indicates that which is paid 
to those who labor under an employer, and have no other 
interest in the business except to secure steady work and 
satisfactory remuneration. It has also a still narrower mean- 
ing, as being the reward of services performed by the day 
or month, as distinguished from salaried employees, such as 
clerks, superintendents, teachers, and clergymen ; also, as 
distinguished from those whose service is paid in the form 
of fees, as lawyers, physicians ; and from those who are com- 
pensated by commissions. 

2. The theory of labor and wages, held by many writers 
in Great Britain, and by some in this country, is that of a 
laboring-class, who furnish the labor, and who are paid out 
of what is called a wages-fund. The capital of the com- 
munity is regarded as a real, but rather indefinite and 
gradually increasing, quantity of wealth. It is supposed to 
exist in the four forms of land, material, implements and 
machinery, and the wages-fund. This last is reckoned as 
fixed for the time, and devoted to the payment of labor. 
The problem of the rate of wages thus involves two factors ; 
namely, the number of laborers, and the amount of the 

150 



WAGES: GENERAL VIEW. 151 

wages-fund. The former is the divisor, and the latter the 
dividend ; the quotient is the rate of wages at any time pos- 
sible. If the number of laborers increase, the fund remain- 
ing the same, wages must diminish. If the fund increases 
or diminishes, the number of laborers remaining the same, 
wages increase or diminish correspondingly. Thus, we are 
told, every thing is determined by natural, inflexible laws ; 
and no matter how low the wages may be, or how hard the 
lot of the laboring-man, there is no remedy. 

Now, the existence of natural economical laws is not to 
be doubted. But it should be borne in mind, that these 
laws, even when correctly ascertained, may be almost infi- 
nitely varied in their operation by various forms of human 
influence. Whether, in this case, the law has been correctly 
ascertained, we shall see hereafter. 

3. It is this habit of regarding laborers as a class, that 
affects the philosophy of some of even the most philanthropic 
writers on this subject. There is nothing in the nature of 
the case that necessitates this. In a large part of this 
country, among the native American population, there is, 
properly speaking, no laboring- class. A large proportion 
of the citizens begin life on their own account, by working 
for wages. Many of these become capitalists in a small 
way, by saving their earnings, and, after a little, begin to 
carry on business for themselves. To a great extent they 
are clearly independent, even while acting as laborers ; and 
it is not uncommon to find a hired man with both more 
means and more ability and intelligence than his employer. 
Into the mind of such a laborer, there never comes the 
thought that he occupies an inferior social position. He is 
simply in the relation of one who has service to sell, and he 
stands in the market on the same footing as the farmer, or 
the manufacturer, or the merchant, who offer their wares, and 
11 



15^ POLITICAL ECO MO MY. 

invite the public to purchase. It is true that this condition 
is not universal here. There is an occasional tendency to 
the degradation of labor through the ignorance or poverty 
of the laborer, and by the opportunities furnished to the 
employer to take advantage, such as the average selfishness 
of humanity would prompt him to use. 

4. But even on the theory of a laboring-class, there must 
be a minimum rate of wages ; that is, a rate below which 
capital itself would suffer detriment. Even among ordinary 
laborers, the lowest wages which can be permanently main- 
tained must be at least sufficient to support a married pair 
in good working-order, and enable them to bring up not less 
than two children. If the wages are not enough for this, 
then the capitalist must sooner or later suffer damage. For, 
if the laborer have so little food or clothing or shelter that 
his physical health is impaired, his labor will be less pro- 
ductive. Unless there be so many children coming to ma- 
turity as to keep up the full number of laborers, there must 
be a decrease of production, to the detriment of the capi- 
talist as well as of the whole community. There is, more- 
over, to be taken into account the liability to sickness and 
accident ; also the fact of old age, when the ability to labor 
diminishes or ceases. Wages which are adjusted to these 
conditions are the lowest possible in any kind of reason. 
Whether such wages would be, economically, the most de- 
sirable, even for the employer and the capitalist, will be 
considered hereafter. There are reputable economists whose 
theories oblige them to regard this as the point to which 
wages naturally tend, and who hold that above, or much 
above, this they cannot permanently rise. The argument 
is, that higher wages, even if compatible with the interests 
of capital, would cause too great an increase of population ; 
thus making the ratio of the latter to capital smaller, and so 
causing again a diminution of wages. 



CHAPTER in. 

WAGES AS AFFECTED BY VARIOUS CIRCUMSTANCES. 

1. We are to distinguish between nominal ivages and real 
wages. The former indicates the amount of ?roney received 
for a certain amount of labor ; the latter has reference to 
the quantity of commodities which the money received for 
the labor will purchase. If a man had received a dollar a 
day in i860, but received in 1870 a dollar and a half for the 
same work, it does not necessarily follow that wages were 
fifty per cent higher in the latter than in the former case. 
This might or might not be true ; but it certainly would not, 
if the purchasing power of money were nearly twice as great 
in i860 as in 1870. 

2. There are various conditions to be taken into account 
in estimating the real value of wages, even when the nominal 
amount is clearly understood. Sometimes laborers contract 
to take their pay in commodities furnished by the employer, 
or on his order ; and it is frequently the fact, that the real 
value of these is less than if the purchaser had ready money 
in hand, and a choice of markets. 

There are also cases where work can be had only a part 
of the year, as those of stone-masons and roof-tinners. If 
the daily wages are twice as high as in ordinary trades, while 
work can be had only half as many days in the year, the real 
earnings are only the same. 

153 



154 POLITICAL ECONOMY. 

3. There are some conditions affecting wages, which are 
different from those just mentioned. There is, first, the 
agreeableness of the employment. This has no small influ- 
ence in determining wages : men will work for less in an 
occupation where the work is to their taste and the associa- 
ations are pleasant, than where it is against their inclinations, 
or in any way repugnant to them. Some occupations imply 
higher compensation, from the fact of the greater difficulty 
of preparation for them. I do not now refer to merely 
those which require a marked, or more than ordinary, natu- 
ral ability, or superior education ; though it is true of them 
also. But there are certain trades to which years of toil 
must be devoted, and sometimes much expense incurred, in 
order to their acquirement. 

One other circumstance which affects wages is the amount 
of trust and confidence which the employed receive from 
the employer. A confidential clerk in a great business house 
receives a large salary. The wages paid to an engineer in 
an extensive factory, or to any other workman upon whom 
the lives of many persons, the safety and efficiency of the 
machinery, and the regular on-going of a vast establishment 
depend, are likely to be much greater than those paid to 
persons upon whom no such responsibility rests, even though 
the labor of the latter may be far more toilsome than that 
of the former. 

4. The influence of the industrial system of a community 
on wages is very great. A section in which agriculture is 
almost the exclusive occupation will be characterized, other 
things being equal, by low wages. The same will be true of 
a community where there is a small variety of industries. 
In the northern counties of England, particularly in York- 
shire and Northumberland, the wages of the agricultural 
laborer in the late autumn and the early winter are thirteen 



WAGES AS AFFECTED BY CIRCUMSTANCES. 1 55 

or fourteen shillings a week ; while for the same kind of 
labor in the south-western counties of Dorsetshire and Wilt- 
shire, the wages average less than nine shillings. The differ- 
ence is not in the nominal, as distinguished from the real, 
wages. The reason for this variation of more than forty per 
cent is found in the fact, that one of these districts has a 
great diversity of employments, while the other is almost 
exclusively agricultural. 



CHAPTER IV. 

HIGH AND LOW WAGES AS RELATED TO DEAR AND CHEAP 

LABOR. • 

1. As we have seen, it is not the amount of money 
received for labor that determines whether wages are high or 
low ; so, on the other hand, labor is counted dear or cheap, 
not by the amount of money paid for it, but by the amount 
of valuable product secured for the money paid. An em- 
ployer may buy a day's work of one man for a dollar and a 
half, and of another for a dollar, just as he may buy one axe 
for two dollars, and another for one dollar. But in both cases 
the higher-priced may be the cheaper. The two-dollar axe 
may be of three times the service that the one-dollar one is, 
and the doUar-and-a-half laborer may effect twice as much 
as the one who works for a dollar. 

There is another way, not always taken, of looking at this 
subject. Low wages are sometimes the cause of inefficient 
labor, as well as the latter of the former. Looking at the 
matter in this light, it is possible that capitalists and em- 
ployers may find some way to avoid the difficulty of the 
wages question without more sacrifice than will result in their 
ultimate advantage. 

2. The theory of a necessaij rate of wages, if rigidly ad- 
hered to, would utterly preclude all hope of any substantial 
improvement in the condition of laborers. They are, ac- 

156 



HIGH AND LOW WAGES. 1 57 

cording to this theory, doomed to remain at the point where 
the rewards of labor are just sufficient to keep them in fair 
working-order on the one hand, and meagre enough on the 
other to prevent their increasing faster than the increase of 
capital. But is there not a possibility that this " necessary 
rate " might keep the laborer at some point below that of 
the highest efficiency practicable to him as even a mere 
human machine? 

" Looking upon a human laborer, then, as we would upon 
a steam-engine, we see that the amount of force which he is 
capable of creating depends upon the amount of food sup- 
plied to him ; a part of it answering the purpose of the 
coal which gives heat, another answering to the water which 
is converted into steam and generates motion. A sheet-iron 
jacket put around the boiler prevents the waste of heat in 
one case, just as a woollen jacket about the body of the 
laborer does in the other. But food, clothing, and shelter are 
supplied to the human machine in the shape of wages. To 
stint them, and to keep the laborer down to the lowest point 
that will induce him to live, without deterring him from prop- 
agation, is precisely the same kind of economy which would 
keep the steam-engines of a nation at half their working- 
power to save wood and water and sheet-iron. The rate of 
wages which such considerations would demand has been 
attained in very few regions of the world. Suppose it any- 
where to have been reached : the laborer is only brought up 
to the condition of an ox. But he has intelligence, which the 
ox has not ; and it is the great element of his industrial power. 
In the lowest description of labor, there is occasion for judg- 
ment in the selection of means, in the modes of exerting 
force most advantageously, and in the adoption of tools 
and simple mechanical principles to economize time and 
strength." ' 

^ E. P. Smith's Political Economy, p, 107. 



158 POLITICAL ECONOMY, 

Clearly enough, economy does not require us to secure 
any kind of labor or laborers that can be had at the lowest 
price, but to secure that labor which will produce the most 
at the least expense. If a man whose nerves and muscles 
are in the best condition because his means of subsistence 
are ample, whose hope of securing a competence gives him 
vigor, enterprise, and self-respect, and whose intelligence 
and prudence enable him to see a hundred ways of econo- 
mizing productive conditions and avoiding waste, demands 
large wages, — who does not see that it is better for his 
employer to meet this demand, than to give half or a 
quarter as much for an ignorant, hopeless, under-fed human 
animal ? 



CHAPTER V. 

"the wages-fund.*' 

1. The doctrine of the wages-fund has been stated in 
Chapter II., 2. The only remedy for low wages, according 
to it, is such restraints as will keep the ratio of population to 
capital below a given point. Any increase of the former 
beyond that diminishes wages. If it increase much, the 
wages will be so low that subsistence will be insufficient, and 
population will be checked. There is no other alternative. 
The laborers must carefully limit the size of their famiUes, 
or suffer the direful consequences of want and famine. It 
would not be so bad if each one had only to govern himself, 
in order to reap the fruit of his own prudence. But it is of 
no account for one or a few to do this, unless there is a gen- 
eral co-operation of laborers. Consequently such a remedy 
is impracticable ; consequently, too, there is no remedy : 
there is the natural rate of wages, and there is no legitimate 
possibility of any general or permanent change for the better. 
For if capital increase, no matter how rapidly, the increase 
of wages could be only temporary ; since, according to the 
theory, this increase would occasion an increase of popula- 
tion, speedily restoring the old ratio. 

2. We have already seen that the amount of product, and 
consequently of profit, is not necessarily inversely as wages. 
The very smallness of the wages sometimes makes the prod- 

159 



l6o POLITICAL ECONOMY. 

uct not only smaller, but proportionally smaller. When 
wages are at the point where they barely keep the laborer in 
good working-condition, a diminution of them will simply 
subtract from his producing-power, with no advantage to the 
employer. 

3. Another argument against the theory under considera- 
tion is set forth by Professor F. A. Walker with great clear- 
ness. He denies the doctrine that wages are paid out of 
capital. The assumption thus contradicted lies at the basis 
of the theory, and is the vicious, though plausible, element 
in it. It is true that capital is often drawn upon for the 
advance of wages. But even this is not always the case. 
Every one who is acquainted with business knows that there 
are many enterprises in which the workmen draw only a 
small portion, and sometimes none, of their wages till there 
are returns from the sale of the product. 

" It is the prospect of a profit in production which deter- 
mines the employer to hire laborers ; and it is the antici- 
pated value of the product that determines how much he 
can pay them. The product, then, and not capital, fur- 
nishes at once the motive to employment, and the measure 
of wages. If this be so, the whole wage-fund theory falls ; 
for it is built on the assumption that capital furnishes the 
measure of wages. The wage-fund is no larger because of 
the lack of capital, and the only way to increase the aggregate 
amount is to increase capital." ^ 

4. Professor Walker shows further, that the theory takes 
no account of the quality of laborers, and is thereby seriously 
at fault. Suppose there is a certain amount of capital which 
is set apart for wages. Now, according to the dogma, this 
is the dividend, and the number of laborers is the divisor 
which is to determine the quotient, that is, the rate of 

* The Wages Question, p. 144. 



" THE wages-fund:' i6i 

wages. It will make no difference, according to the theory, 
whether these laborers are the better class of English and 
American workmen, or the worse class of Italian or East 
Indians whose efficiency averages less than one-fourth that 
of the former : the wages must be the same ! 



CHAPTER VI. 

Carey's law of the increase of wages. 

1. Mr. Carey has developed what he regards as a grand 
law governing the relations of labor to capital in every well- 
ordered society. This principle is also supported by Bas- 
tiat, one of the leading French economists, and by others 
of note. It may be stated as follows : As society advances, 
the laborer's proportion of the joint product of labor and 
capital tends steadily to increase ; the proportion of the cap- 
italist tends steadily to decline ; while the quantity assigned 
to both steadily increases. This is in accordance with the 
principle already illustrated, that, as society improves (at 
least up to a certain point, which no nation has yet reached), 
both wealth and population increase, but the former faster 
than the latter. 

2. Let us look at some apparent manifestations of this 
principle. The savage who has invented a bow and arrow, 
with which he can secure as much game in a day as before 
in a week, may loan them to a neighbor on the condition 
of receiving for their use three-quarters of the product. 
This may seem like an enormous profit ; but to the bor- 
rower, even at that rate, it is a very great advantage ; since, 
after paying for the use of the implements, he still has twice 
as much game as he could have secured without them. But, 

as other men construct bows and arrows, there is a compe- 
162 



CAREY'S LAW OF THE INCREASE OF WAGES. 1 63 

tition among the capitalists ; and the instruments begin to 
be loaned at the price of two-thirds, one-half, one-quarter, 
and one-tenth or twentieth of the product. As other inven- 
tions come in, the same thing will occur in respect to them ; 
namely, that capital will be having an always diminishing, 
and labor an always increasing, proportion of the joint prod- 
uct. The first fishing-net, the first canoe, and the first rude 
cutting-instrument bring large compensation for their use; 
but they will prepare the way for others which will not only 
be improvements on their predecessors, but, by reason of 
their multiplication, will command less and less compen- 
sation. 

3. Take as an illustration the cutting instrument. Poor 
as was the axe of stone, its utility was very great. The 
canoe, which could not be constructed at all without it, gave 
great increase of power to the owner. Another than the 
owner of the axe can well afford to pay the latter three- 
quarters of all he can produce by the use of it, for the one- 
fourth falling to his own share is much more than he could 
secure without it. 

After a time the bronze axe is invented, and proves far 
more useful. The stone axe is still in use ; but its value has 
greatly depreciated, since the same amount — or probably 
asmaller amount — of labor is requisite to the production 
of the bronze axe. For this reason the owner of the latter 
will loan it for something less than the proportion previously 
received for the stone axe, say for two-thirds the product. 
As this product will be at least twice as great as before, both 
the laborer and the capitalist are benefited ; the former re- 
ceiving a larger proportion as well as a large amount of the 
product, while the latter receives also a larger amount, though 
a smaller proportion. The comparative effects of the later 
and earlier distribution are as follows : — 



164 



POLITICAL ECONOMY. 



Stage. 


Total 
Product. 


Laborer's 
Share. 


Capitalist's 
Share. 


First 

Second 


4 
8 


I 

2| 


3 



" The reward of labor has more than doubled, being an in- 
creased proportion of an increased quantity. The capital- 
ist's share has not quite doubled, he receiving a diminished 
proportion of an increased quantity. The portion of the 
laborer, which had been at first as one to three, is now as 
one to two, with great increase of power to become himself 
a capitaHst." 

The axe of iron now being invented, and being the prod- 
uct of less labor than the axe of bronze, but having at the 
same time far greater utility, its owner will be content with 
a still smaller proportion, while he will receive a still larger 
amount of the product. So of the axe of steel, coming after 
that of iron : its cost will be less, while its product will be 
more. The capitalist will find an augmentation of his share 
of the product, but his proportion will be still less than 
before. Both the proportion and the amount falling to the 
laborers will be enhanced. The following table will rep- 
resent the whole process of the operation of the law : — 





Total 
Product. 


Laborer's 
Share. 


Capitalist's 
Share. 


Axe of stone .... 
Axe of bronze . . . 
Axe of iron .... 
Axe of steel .... 


4 

8 

16 

32 


I 

2| 

8 


3 
8 

12-1% 



CAREY'S LAW OF THE INCREASE OF WAGES. 1 65 

Of course, this is but an imperfect representation of the 
operation of this principle, but it is exemplified in a great 
variety of facts in the relations of human society. It is not 
a mere theory, beautiful and wholesome in idea but prac- 
tically inoperative. The whole history of labor in its rela- 
tion to capital, whether in the form of wages or rent or 
interest, indicates more or less clearly its existence. It is 
not intended to assert that it operates palpably everywhere 
and under all sorts of conditions. The bad policies adopted 
by communities, or the surrender of general to class interests, 
may counteract this as well as any other natural tendency. 
But, in an advancing civihzation and a prosperous community, 
this law is nearly certain to manifest itself. 

4. No one can reasonably doubt that real wages have 
been advancing in all the civilized nations during the last 
three or four centuries. That the laboring-men in most of 
the European countries are, as a general rule, better fed, 
clad, and housed now than they were a century ago, and 
that they were then better off than in the previous century, 
can easily be made evident. Says McCulloch, himself a 
disciple of Ricardo and Malthus, " Let any one compare 
the state of this or any European country with what it was 
five hundred, or even one hundred, years ago, and he will 
be satisfied that prodigious advances have been made ; that 
the means of subsistence have increased much more rap- 
idly than the population ; and that the laboring-population 
are now generally in possession of conveniences and luxuries 
that were formerly not enjoyed by the richest lords." This 
is more conspicuously true in France than in England. 



CHAPTER VII. 

REMEDIES FOR LOW WAGES. 

1. Are there any real remedies for the evils which are still 
incident to our system of labor? If the theory of wages 
which we have been examining is correct, there would seem 
to be no help. Yet, since great improvements have been 
going on for some centuries, and as these have taken place 
without violating any natural law, and even in opposition to 
many adverse theories, and in spite of social, governmental, 
and other unnatural obstacles, it is pretty nearly certain that 
there must be some economic principles in accordance with 
which general and constant improvement may come. 

2. The extent to which the government may interfere to 
promote the interests of the laborer is a question of some 
importance. If the doctrine held by the extreme school of 
British economists is correct, — namely, that government has 
no functions except those implied in maintaining justice, — 
that settles the question. But there are very few of even 
this school who accept the extreme consequences of their 
premises. It is generally admitted, that it is the duty of 
the government to see that every man has a fair chance to 
dispose of his labor to the best advantage. No one should 
be arbitrarily excluded from privileges which under the same 
circumstances others are permitted to enjoy. Fair and 
equal competition is not to be complained of; but unequal 

i66 



REMEDIES FOR LOW WAGES. 1 6/ 

competition, caused or occasioned by obstacles which gov- 
ernment can remove, should not be permitted. Government 
cannot fix the rate of wages, or the prices of commodi- 
ties, or do any thing necessarily implying either of these ; 
but there are some things that come naturally within its 
province. 

It may provide for general education ; it may also, to a 
considerable extent, furnish opportunity for technical educa- 
tion. It can prevent the employment of young children in 
factories and shops ; both that they may have opportunity for 
education, and for other economical reasons. It may make 
sanitary regulations in the interests of laborers, both in re- 
spect to the rooms and buildings in which labor is to be per- 
formed, and in respect to tenements and lodging-houses. 
It may, too, within certain limits, regulate the hours of labor ; 
though these limits would probably differ under different cir- 
cumstances. There is, of course, a possibility of uneconom- 
ical as well as economical action here. 

3. A supposed remedy for low wages, to which resort is 
often had, is that of a " strike." This is simply a combina- 
tion of workmen to make a demand upon their employers 
concerning wages and other conditions, and a refusal to 
work unless their demands are met. If the workmen are 
united, and remain firm, unless the employer can secure 
other workmen, the latter must accede to the conditions, 
or his whole capital must lie idle at no small loss, until one 
party yield, or some compromise is effected. 

Strikes have been summarily condemned by many persons. 
Of course, if the theory of a rigid natural rate of wages is 
correct, strikes are not only useless, but every way harmful. 
Whether, in the case of the incorrectness of that theory, such 
combinations are effective of any good, is an open question. 
That laborers as well as employers may find some advantage 
13 



1 68 POLITICAL ECONOMY. 

in combination, is not doubtful. The very fact that there is 
a liability of such combinations, is of itself an inducement to 
employers to avoid all occasions for them. 

On the other hand, there are on the side of the laborers 
many obstacles to success by this device. It is not always 
practicable to make the combination so general but that 
other laborers can be secured in the place of those in the 
strike. Again, there is a great loss of time, and therefore of 
wages. Those who earn only enough to support themselves 
from day to day have no store laid by, and therefore must 
depend on the earnings of the more fortunate. It is of the 
essence of a successful strike, that all who engage in it be able 
to hold out. To this end, those who have saved any thing 
must share v>^ith those who have nothing. It thus becomes 
a question of average means, and this is pitted against the 
usually still greater means of employers. The chances are 
against success, and yet success is not impossible. There 
are cases in which the employers are compelled to yield. 
But even in the event of success, the loss may be greater 
than the gain. Dr. John Watts ' illustrates the losses and 
gains of a successful strike. " Assuming five per cent ad- 
dition to existing wages to be the matter in dispute between 
the employers and the laborers, he shows, that, if the strike 
succeeds, its results will be, roughly speaking, as follows : — 

The loss of I lunar month's wages will require, to make it up, i§ years 

of work at the extra rate. 
The loss of 2 lunar months' wages will require, to make it up, 3^ years 

of work at the extra rate. 
1 he loss of 6 lunar months' wages will require, to make it up, 9§ years 

of work at the extra rate. 
The loss of 12^ lunar months' wages will require, to make it up, 20 

years of work at the extra rate. 

* See Professor F. A. Walker: The Wages Question, pp. 30, 31. 



REMEDIES FOR LOW WAGES^ 1 69 

"The strike of the London builders in 1859 was for ten 
per cent of time, or its equivalent, ten per cent of wages, 
and, as it lasted twenty- six weeks, would, if successful, have 
required ten and two-fifths years of continuous work at the 
extra rate to make up the loss of wages sacrificed." 

There are other losses implied in a strike. A period of 
idleness is likely to furnish occasion for the formation of bad 
habits which may be a permanent detriment to the laborer. 
The circumstances are also apt to engender bad blood, arfd 
this is economically as well as otherwise a damage. The loss 
of the employer is always something ; and this is a diminution 
of the capital of the community, and, so far forth, harmful to 
the laborer. Further, the diminution of product occasions 
enhancement of value ; and this, if general, is a virtual reduc- 
tion of wages. 

It thus appears that strikes are not an unmixed good, even 
when successful. When unsuccessful, they are a serious mis- 
fortune. On the other hand, they are not an unmixed evil. 
They do sometimes effect that at which they aim The fact 
that they are possible, and even actual, is a perpetual advan- 
tage to the laborer in every contest to which he is liable with 
the employer. 

4. Trades-unions are a more permanent form of combi- 
nation than strikes. They embrace usually only laborers 
of the same trade. They have two general objects. In the 
first place, they serve the purposes of mutual aid. Informa- 
tion is diffused, the sick and disabled are assisted, and any 
case of unusual hardship or oppression becomes the interest 
of the whole. So far they are, or at least may be, of great 
advantage. As a means of mutual defence, encouragement, 
and intelligence, they add to the value of man, tend to the 
increase of production, and secure for the laborer a con- 
stantly growing proportion of the joint product of labor 
and capital. 



I/O POLITICAL ECONOMY. 

In the second place, a trades-union contemplates such 
an organization of its members as will have a direct influence 
upon their wages. There is a purpose to compass directly, 
and sometimes by questionable means, such a rise of wages 
as can only come about in accordance with fixed economical 
principles. One of the methods used is, to restrict the num- 
ber of laborers in a particular trade. Some unions have 
rules designed to effect this limitation. Only a certain num- 
ber of apprentices are to be permitted. Employers must 
not admit new workmen except under certain specified con- 
ditions, and only so many within such and such times. The 
motive is to keep the number of laborers so small that wages 
shall be as high as possible. It may be temporarily advan- 
tageous, possibly permanently so in a few cases ; just as it is 
advantageous to a company of capitalists to obtain control 
of the whole supply of a commodity for which there is a 
large demand, and thus keep the trade in their own hands, 
and prevent free competition. In the one case, as in the 
other, the supply is smaller than if there were no restriction, 
and the price of the article is greater. In the case of the 
trades-union, by limiting the number of laborers, the product 
is diminished, and the price is increased, making a doubly 
bad economical result. 

5. Co-operative association has been largely urged of late 
as a remedy for the disadvantages of workingmen. By co- 
operative association pure and simple, is meant the carrying- 
on of a business enterprise on such terms that profits shall 
be wholly divided among the laborers, in proportion to the 
contribution of each to the product. There have been some 
remarkable and successful experiments in this direction 
within the last thirty years ; but the most of these, and es- 
pecially the most conspicuous, have been not in productive, 
but in commercial, enterprises. One of these has had a 



REMEDIES FOR LOW WAGES. I /I 

fame extending over the civilized world ; namely, that of the 
Rochdale Association. This combination has unquestion- 
ably been a successful one, and greatly advantageous to its 
members and patrons. It has been thought, because of 
the success of this and some other but inferior instances 
of commercial co-operation, that the principle could be 
applied to manufacturing industry. There have been some 
experiments in this direction, and with a certain degree of 
success in England. Yet, as I have understood, the co- 
operation has not extended to all the laborers, only to those 
furnishing capital ; so that, after all, they have been of the 
nature of joint- stock companies. 

6. Among the difficulties m the way of productive co- 
operation are to be reckoned the reverses to which all busi- 
ness is liable, and which require a considerable reserve of 
capital in order that they may be safely tided over. Expe- 
rienced business men have estimated, that, on the average, 
about one year in six there will be no profit in most kinds 
of manufacturing, and there may be a considerable loss. 
The profits of the other five years have to make up this 
deficiency. Now, if there is only capital enough to carry on 
the business in these prosperous years, there will be in the 
adverse years, not only no profits to be divided, but there 
may a failure of wages. 

Another more serious difficulty is found in the nature and 
requirements of what has all along been spoken of as the 
employer J- The employer is to be distinguished from the capi- 
talisty with whom he is often confounded. The functions of 
both may co -exist in the same individual, but they are not 
identical- The employer must be a man competent to con- 
dtici business. He must be an organizer, not merely a 

* See F. A. Walker: The Wages Question; also Political Economy, by the same 
author. 



1/2 POLITICAL ECONOMY. 

superintendent or overseer ; but he must have the skill and 
the ability to put labor and capital together so as to render 
them profitably productive. He must also have several 
other qualities that do not often come together in one per- 
son, — good financial ability, a quick discernment and ready 
judgment in buying and selling, an accurate perception of 
the wants of the public both in character and extent, and 
many other things. He may be without capital of his own ; 
and yet, whether a capitalist or not, he is a " captain of in- 
dustry," and just as essential to the carrying-forward of 
productive enterprises as the commander of an army to the 
conduct of a campaign. 

There are only a few persons in whom all these conditions 
meet. But such men are as essential to the laborers as they 
are to the capitalist, and they cannot be furnished to order 
from either class. Here, then, is the difficulty. Where the 
industry is free, and all have something hke a fair chance, 
the employer generally and naturally comes to his place. I 
do not assert that there are no mere wage-laborers who are 
not as competent to be employers, in the sense in which 
that term is here used, as many who now essay to exercise 
that function. But there is, in the co-operative system, no 
natural method of ascertaining such a functionary. There 
must be experiment, and experiments in such a case are 
costly. A single unsuccessful one would be disastrous : two 
successive failures would most likely prove fatal. 

7. Co-pai'tnership of industry has sometimes been tried 
by employers and proprietors with gratifying results. La- 
borers may be admitted to a participation in the profits 
which are realized through their own industry. Professor 
Fawcett ' discusses this device in an interesting way. I avail 
myself of some of his illustrations. The reluctance of em- 

' Manual of Political Economy, pp. 250-253. ^ 



REMEDIES FOR LOW WAGES. 1 73 

ployers to concede the demands of their workmen for the 
increase of wages, is based upon the supposition that every 
such increase diminishes by just so much their profits. This 
has been the settled opinion of some economists. It has been 
shown in previous sections, that this is by no means always 
the case. Other instances go to show its incorrectness. 

One of the illustrations of the advantage of co-partnership 
in production is that of M. Leclaire, a house-decorator in 
Paris. He employed about two hundred workmen, and had 
become greatly discouraged with the apathy and careless- 
ness which they manifested, subjecting him to constant loss 
and annoyance. He therefore proposed to give them some 
pecuniary interest in the work, hoping to inspire in them a 
higher ambition with reference to it. He called them to- 
gether, and told them he would continue to pay them the 
customary wages, and at the end of the year would distrib- 
ute among them a certain share of the profits realized. The 
plan worked admirably ; and M. Leclaire declared not only 
that he was otherwise satisfied, but that he was in a pecuniary 
sense abundantly recompensed for the share of the profits 
given to the workmen. Nor is this unnatural. It accords 
with the principle previously set forth. Larger remuneration 
often adds to the efficiency of the laborer ; and this impHes 
larger product, and consequently more to be distributed. 
In the case before us, there is an additional reason for a 
larger product, and hence a larger profit. There is the 
motive to save material and tools, and to make the most 
possible out of what is furnished. Much is also saved in 
the matter of superintendence. The cost of overseeing la- 
borers who are interested only to receive their wages, and 
are careless whether the employer realizes much or Htde 
from their work, is usually very great. But when the em- 
ployee has a direct interest in the product, there is less 



1/4 POLITICAL ECONOMY. 

liability to shirk or to waste, and a greater inducement to 
make every thing tell for the interest of the enterprise. In 
such a case, labor largely superintends itself, and the expense 
otherwise incurred is added to the profits. 

8. The wages of women. A social phenomenon which 
few have failed to observe is that of the difference between 
the wages of women and those of men in similar employ- 
ments. At first sight the fact seems out of harmony with the 
general laws of political economy, yet the apparent discord 
is not altogether inexplicable. 

There are several reasons why the wages of women are 
lower than those of men. One, and perhaps the most in- 
fluential of these, is that the supply of the kind of service 
which women offer in the market is much greater in pro- 
portion to the demand for it, than is the kind of labor offered 
by men. Let us look at this a little more particularly. Owing 
to what seems to many a vice of our social system, the variety 
of labor which women have to offer for wages is very limited, 
while the amount is very great. There are comparatively 
few occupations to which women are admitted. Hence the 
number of women who have labor to sell, though not so great 
as that of men, is yet far greater in proportion to the work 
they are permitted to do. The occupations open to them 
become densely crowded, and the competition among those 
seeking wages is very great. In the very nature of things, 
the wages are lower than they otherwise would be. House- 
work, millinery and dressmaking, general sewing, some ser- 
vice in shops, fancy work, and teaching have been till 
recently, for the most part, the occupations to which women 
have been admitted. Because women must work in these 
if at all, the supply of labor has become so great that the 
wages in them must be smaller than if the demand were to 
the supply the same as in the case of men. 



REMEDIES FOR LOW WAGES. 1 75 

Another obstacle to the improvement of women's wages 
lies in the fact that it is more difficult for them to carry 
their labor to market than for men. "While women have 
thus far more occasion relatively than men to move to theii 
market, we find them disabled therefrom in a great measure 
by physical weakness, by timidity, and by those liabilities to 
misconstruction, insult, and outrage which arise out of sexual 
characteristics. Having more need than men to move from 
place to place, they have less ability to do so. It must be 
remembered that it is not a question merely of taking a 
journey from home to a place where a ' situation ' has already 
been engaged ; but it may be of seeking out employment 
from street to street and from shop to shop, by repeated 
inquiries, often through much urgency, and persistency of 
application." ^ 

One other reason why women's wages are lower than 
men's is that the former seldom learn trades, or fit themselves 
for permanent callings. For the most part, they are looking 
to an early termination of any pursuit which may be adopted. 
This is itself a partial disqualification for any vocation. 

The principal remedy for the disadvantage to which women 
are thus subject is, as I conceive, the removal of restrictions 
which custom and a wrong public sentiment have established 
in respect to their occupations. That this is already con- 
stantly taking place, no one can doubt ; and the natural 
results are obvious. Within the last thirty years the wages of 
women have advanced very much more than those of men. 

9. Immigration a5 affecting Wages. — This is a com- 
plicated subject, and there is space to touch only briefly 
upon it. It would seem at first sight that if there were 
plenty of laborers already in a community, the advent of 
an additional number from abroad would so increase the 

1 F. A. Walker: The Wages Question, p. 376. 



176 POLITICAL ECONOMY. 

supply as to diminish the rate of wages. No doubt in 
many cases this is true, but not always nor necessarily. 
It must be had in mind that immigrants not only bring 
additional labor into the labor market, but they also bring 
additional wants, and this implies an additional demand 
for commodities, and this implies a demand for additional 
labor. If a hundred persons come into a community they 
must have food and clothing, and houses to live in, and 
whatever else pertains to the support of human life. There 
must be an additional outlay of labor to supply these wants, 
and it is very likely to be the case that the additional 
demand for labor will not be less than the additional sup- 
ply. So far the laborers already present suffer no harm, 
but this is on the supposition that the new laborers are of 
about the same grade as those already here, and that their 
wants are about the same. But if the new laborers are of 
a lower grade than the average of those already here, the 
latter would doubtless suffer detriment, though not corre- 
sponding fully to the number added. These will have 
some wants, at any rate, which it will take additional labor 
to supply. It is also to be taken into account that this 
class of laborers are less efficient than the average of those 
among whom they come, and therefore, at even lower 
wages, are not so profitable to the employer. They will, 
therefore, in any case, displace only an inferior grade of 
laborers. 

Still it is undoubtedly true that the great numbers of im- 
migrants recently pouring into the country, accustomed to 
a low style of living, such as our American laborer is not 
accustomed to, do tend to diminish wages to a certain 
extent, and are otherwise harmful to the interests of our 
communities. This evil appears to call for the interfer- 
ence of the government in the use of its powers to promote 
the general welfare. 



CHAPTER VIII. 

PROFITS. 

1. The term profits has already been defined as the portion 
of the joint product of labor and capital which goes to the 
employer. It is sometimes loosely spoken of as the capital- 
ist^s share. This is incorrect. The loaners of money, or of 
real estate, or of other property, are capitaHsts ; and what 
they receive for these comes under the heads of interest and 
rent. 

The employer may be and often is a capitalist, but he is 
not always and necessarily so. The distinction between the 
two has already been noted. " Capital cannot move itself. 
Labor cannot command capital, and therefore has little 
power ; hence the necessity for an employer or business-man 
to effect a union, and put both in successful operation. 
Capital without labor is an infant : labor without capital is 
a cripple." ^ 

2. The ability to organize and manage a business, and the 
skill involved therein, especially if there be much capital and 
many laborers, entitle the possessor to a larger share of the 
product than an ordinary laborer can command. The very 
principle which is the basis of distribution, and from which the 
law governing it is evolved, is that each producer is entitled' 
to an equivalent of the value by him created. If one man 

* Amasa Walker: The Science of Wealth, p. 311. 



178 POLITICAL ECONOMY. 

can catch twice as many fish as another, or if one boy picks 
three quarts of berries while another picks only one, evidently 
each is entitled to all he secures, and no more. The girl who 
tends six looms ought to have larger compensation than the 
one who tends but two. So, if one man brings to a business 
a certain high order of talent, and by its exercise so organizes 
and manages the labor and the capital that ten or twenty times 
as much is produced as would be without such directions, 
then a larger share of the result properly belongs to him than 
to an ordinary workman. Few men would put forth exer- 
tion simply for the public good, especially when it is morally 
certain that many would take advantage of such action to 
escape toil, and live upon the product of the better dis- 
posed. This would especially be the case with those compe- 
tent to be employers. The responsibilities and cares of 
business would not be assumed by a man who knew that in 
so doing, though he might be the cause of manifold greater 
production, he would only secure for 'himself the same com- 
pensation as an irresponsible laborer. He would suffer far 
less by declining, than the rest of the community ; since it 
depends largely upon the competent employer whether there 
shall be plenty of work at good wages, or the opposite. That 
the most competent employers should secure large profits, 
does not imply a diminution, but always an increase, of 
wages. 

3. Another element which enters into the calculation of 
the just claims of profits is, the risk and uncertainty attach- 
ing to a business enterprise. Disasters are liable to occur 
in every undertaking. The most careful foresight cannot 
anticipate some of these. The profits of a business, what- 
ever their rate, will be in no two successive years the same. 
Sometimes there will be positive loss. Hence allowance 
must be made, not only for making up actual losses, but for 



PROFITS, 179 

the years in which the gains fall below the normal rate. A 
part of the losses can be calculated with approximate cor- 
rectness. There will be a certain number of fires, of ship- 
wrecks, and of other disasters, within a certain period of - 
time, and in a given number of enterprises. Insurance 
companies base their calculations upon such data. The in- 
surance premiums themselves are a part of the expense of 
the business, and must be deducted before the proportion 
of profits can be determined. But there are other liabilities 
which are quite incalculable, — the failure of crops, and dis- 
asters in mining operations, diminishing the material to be 
worked up ; financial revulsions, affecting trade and decreas- 
ing consumption j and a thousand other incidents and influ- 
ences. 

We have seen that the doctrine largely prevailing concern- 
ing wages is, that they are paid by capital. In estimating 
profits on this hypothesis, we should naturally deduct from 
the gross profit what had been paid out for wages, to replace 
capital so expended. Then, after subtracting all expendi- 
tures for repairs, wear and tear of machinery, insurance, 
interest, losses, etc., the remainder would be profits. There 
is a doctrine growing out of the above, and going in general 
with that of the wages-fund, that profits are inversely as 
wages. Yet, if the conclusions at which we have arrived on 
several points are true, this is not so. It is, rather, as Pro- 
fessor Walker teaches, that profits are in no case, nor in any 
part, taken from wages. The probable truth of the matter is, 
that the larger either is, — other things being equal, — the 
larger will be the other. 

4. It has been stated, that in this country we have, strictly 
speaking, no monopolies. We find something like an excep- 
tion to this in the case oi patent and copy rights. These are 
held to be both just and economical. It has been urged 



l8o POLITICAL ECONOMY. 

against this view, that such privileges are of no real advan- 
tage to the community ; that a benevolent man will delight 
to confer upon society every such boon of which he has been 
the creator ; that the honor and fame of the invention are 
a sufficient inducement to the exercise of the ability implied ; 
that many of these inventions are accidental, and cost the 
inventor nothing ; that, in many instances, devices are sought 
as an aid in the particular work of the originator, and that 
the advantage thus gained is a sufficient incentive. Hence 
it is inferred that the only economical reason for exclusive 
privilege is removed, since there would be as many useful 
inventions without as with it. 

But, on the other hand, it must be evident that a majority 
of the inventions which aid in the multiplication of wealth 
involve sacrifices which would never be incurred but for the 
hope of reward ; and that, even in the case of those who are 
mainly moved to their undertaking by public spirit, this hope 
adds a stimulus without which, in many instances, the enter- 
prise would fail. Sometimes a man has spent a large for- 
tune, and given many years to the devising of plans and 
instruments, by which humanity will be benefited for ages 
to come. To such a man, no compensation likely to be 
bestowed will be more than a small fraction of the good 
conferred. 

The case of the author is similar to that of the inventor. 
If, by diligence and self-denial, combined with a certain 
ability, he has produced a book of value, he is entitled to 
remuneration for his labor. But, if there be no positive re- 
striction, any one may copy the thoughts of the author, and 
dispose of them as his own. This appropriation of the im- 
material productions of others is prevented by the provis- 
ion known as the copyright law. 



CHAPTER IX. 

INTEREST. 

1. Interest is the compensation paid for the use of capi- 
tal in the form of money. Strictly speaking, when capital 
in any other form is loaned, the compensation for its use is 
reckoned as rent. But sometimes the loan is of other prop- 
erty, though regarded as money ; and so the compensation is 
reckoned as interest. For instance, a man buys a farm for 
three thousand dollars. He is able to pay but one thousand 
down. He may do one of two things : he may borrow two 
thousand dollars, giving, as security, a mortgage on the farm, 
and with this and the thousand dollars of his own make the 
purchase ; or he may pay the thousand dollars, and for the 
rest give the former owner a note secured by mortgage. 
Here he does not literally borrow the two thousand dollars ; 
but he borrows two-thirds of the farm, with the privilege of 
paying for it at some future time. But the whole arrange- 
ment is as if the buyer had borrowed the two thousand dol- 
lars ; that is, the unpaid-for portion of the farm is put in 
the form of money, and the compensation for the use is 
/eckoned not as rent, but as interest. 

2. The rate of interest depends on several considerations ; 
and it differs in different countries, as well as at different 
times in the same country. Some of the causes determining 
this variation will here be set forth. 



1 82 POLITICAL ECONOMY. 

1. The rate of interest is influenced by the amount of 
money in circulation. Not that the rate is always inversely 
as the amount. Some have denied that the amount has any 
thing to do with the rate : others have asserted that the rate 
is highest when the circulation is the largest. The latter is 
true in some instances, but there would be Httle difficulty 
in showing that this is due to other causes than the abun- 
dance of money. Money is like other things : in general it 
can be bought and sold and borrowed more cheaply when 
it is abundant than when it is scarce. It is sometimes the 
case, that scarcity of money has deranged business, paralyzed 
industry, and produced general distrust. At such a time, 
there is a small demand for money, no one daring to venture 
upon any new business or the revival of an old one. Under 
such conditions, though a really small amount of money is 
in circulation, the amount relative to the demand is large, 
and interest is low. 

2. It depends upon the profits of business ; and this again 
depends upon the industrial system and the condition of the 
community. If there are but few occupations, and the 
range of industries is limited, the rate of profits is likely to 
be high, and that of wages low. In the infancy of society, 
as we have seen, the capitalist absorbs both a very large 
proportion and a very large quantity of the joint product 
of labor and capital. But as society advances, and industry 
becomes diversified and labor more productive, the laborer 
receives both a larger quantity and a larger proportion of the 
product ; while the capitalist gets a smaller proportion, but 
a larger quantity. In accordance with this law, the rate of 
interest diminishes with the advance of society. The high 
rate of interest in some parts of the United States is owing 
to the scarcity of capital, the comparatively small variety 
of industries, the extraordinary productiveness of labor, and 



INTEREST. 183 

the high rate of profits. The last two are closely connected 
Land is abundant, cheap, fertile, and easily cultivated. 
Hence a little money invested in agriculture gives good 
returns. Labor as well as money is scarce : the product 
of the laborer, in proportion to his wages, is greater than 
almost anywhere else. In all the industries, not only is the 
rate of wages and of profits higher, but the aggregate of 
profits is larger. As it is this which determines the pros 
perity of the community, the people are generally in better 
condition than in other countries, in spite of the high rate 
of interest. Yet we see, that just in proportion as industry 
becomes varied, and commerce increases, in any section of 
the country, the rate of interest diminishes. 

3. The rate of interest is affected by both the scarcity 
and the uncertainty of capital. (^) If the people are vicious, 
indolent, and reckless of their obligations, it will be unsafe 
to invest property in such a community \ and capitalists will 
not do it except at a high rate of interest, {b) The charac- 
ter of the government will have much influence. If it is 
weak and inefficient ; if the laws are inadequate, and feebly 
executed ; if contracts are not enforced, and crime is unpun- 
ished, — capitalists will not loan, except on usurious condi- 
tions. If the government is of the opposite character, other 
things being equal, the rate is likely to be low. {/) The 
general thrift of the community has something to do with 
the security of capital. It is safer in a community where 
men are enterprising and public-spirited, where there is fru- 
gality and economy, than in one of an opposite character. 
A declining community, where property is constantly depre- 
ciating, is not a good one in which to invest capital. 

4. Finally, the rate of interest depends on the facility with 
which the evidences of debt can be re-converted into money. 
It is frequently the case, that persons have money which 

I 



I §4 POLITICAL ECONOMY. 

they would be glad to loan temporarily, even at a low rate : 
but they are liable to need it at any time ; and they must 
either keep it on hand, or so loan it that they can claim it 
again at the shortest notice. Borrowers will not be willing 
to pay as much for the use of money for the return of which 
they may be suddenly called upon, as for that which may be 
retained for a definite and stipulated time. To many loaners 
of money, it is also of the greatest importance that the inter- 
est be paid regularly and punctually. They would rather 
have a lower rate, and have an assurance in this respect, than 
to be subject to uncertainty with a higher rate. 

It is partly on account of the complete security, ready 
conversion, and prompt payment of interest, that the bonds 
of stable governments are considered the best investments. 
It is largely for this reason, that the rate of interest on these 
is lower than on other securities. They are always in the 
market, and can be bought with little difficulty by any one 
who wishes to invest in them. They are as readily sold 
whenever the holder needs the money for any other purpose. 

13 



CHAPTER X. 

RENT. 

1. Rent, or the portion of the product going to the ownei 
of any land on which any industry depends, has always been 
a subject of leading importance in political economy. Yet 
what is strictly signified by rent is of less consequence here 
in the United States than in most other countries. Here, to 
a greater extent than elsewhere, the owner and the occupier 
of land are the same person. The agricultural interest 
among us is supported mainly by men who own farms of 
moderate size ; and, though in some parts of the country 
there are those who severally hold estates of thousands 
of acres, still the owners are usually also the managers of 
the whole business of their plantations. In many parts 
of the Continent of Europe, and more largely still in Asia, the 
occupants of the soil are not the owners. The proprietor 
leases the land to certain parties, who convey to him a stipu- 
lated proportion of the product. Somedmes this is paid in 
kind, but frequently there is a commutation in money. 

It might seem more in accordance with the condition of 
things in our own land, to have discussed this subject in 
another connection. Still, as rent is closely connected with 
the occupancy and value of land, and as these subjects 
have been so largely discussed under this title, and there are 
so many both errors and valuable doctrines that have been 

i8s 



1 86 POLITICAL ECONOMY. 

evolved under this method of treatment, we shall probably 
get a better view of the phenomena in this way than in any 
other. 

2. Land is altogether the most important instrument and 
condition of wealth which is furnished to man. Out of it 
originally come all the materials upon which the labor of 
man can confer value. Though it is not independent of 
extraneous conditions, and though its products would be 
of small account without the co-operation of other agencies, 
yet other things are more dependent upon it than it upon 
any of them. 

It is furnished by nature, like air and water and sunshine ; 
but, unlike them for the most part, it can be appropriated. 
It can also be cultivated as they cannot It may not merely 
be made to produce something, but its capabilities may 
be indefinitely increased. It is also capable of deteriora- 
tion. Like other instruments, it may be worn out and 
spoiled. 

3. What constitutes value in land ? J, S. Mill and others 
hold that it has what is called a " monopoly value," and that 
this makes an essential difference between it and other 
property. Commodities have a value bearing some sort of 
relation to the amount of labor requisite to their reproduc- 
tion. But land, it is said, cannot be produced by labor ; 
hence its original value is not determinable by this standard. 
Nor is it valued merely according to the improvements made 
on it. When a man purchases a piece of land, he is sup- 
posed to calculate the amount of profit he can make from it 
by employing his own labor or that of others upon it. The 
reason for the peculiarities in the character of land is repre- 
sented to be, that certain individuals, having acquired a com- 
mand or control of the land in a country, intercept the 
bounty of nature, and exact a price for that which was de- 



RENT, 1^7 

signed to be freely bestowed. This comes,^ ^according to 
Mr. Mill, from " the limitation of its quantity." 

Mr. Carey, on the other hand, teaches that land is under 
the same law as that which affects the value of all other 
commodities; that whatever value it has, has been created 
by labor, and is to be estimated, as in the case of other val- 
uables by the amount of labor which would be necessary to 
bring it to its present condition could it be again taken m 
its primitive estate. Land itself, in its natural relations, has 
no value. It is that which is done on it, or in some relation 
to it, which gives it value. 

4 Ricardo's theory of rent has been accepted by a large 
and' reputable class of economists, both in Great Britain and 
the United States, for the last fifty or sixty years. It is here 
presented in the words of the author. 

" On the first settling of a country in which there is an 
abundance of rich and fertile land, a very small portion of 
which is required to be cultivated for the support of the act- 
ual population, or indeed can be cultivated with the capital 
which the population can command, there will be no rent ; 
for no one would pay for the use of land when there was an 
abundant quantity not yet appropriated, and therefore at the 
disposal of whomsoever might choose to cultivate It. ... If 
all land had the same properties, and if it were boundless in 
quantity and uniform in quality, no charge would be made 
for its use unless where it possessed peculiar advantages of 
situation. It is only, then, because land is not unlimited in 
quantity and uniform in quaUty, and because, in the progress 
of population, land of an inferior quality or less advanta- 
geously situated is called into cultivation, that rent is ever 
paid for the use of it. When, in the progress of society, land 
of the second degree of fertility is taken into cultivation, 
rent immediately commences on that of the first quality; 



1 88 POLITICAL ECONOMY, 

and the amount of that rent will depend on the difference 
in the quality of the two portions of land. . . . When land 
of the third quality is taken into cultivation, rent immediately 
commences on the second ; and it is regulated, as before, by 
the difference in their productive power. At the same time 
the rent of the first quality will rise ; for that must always 
be above the rent of the second by the difference between 
the produce which they yield with a given quantity of capi- 
tal and labor. With every step in the progress of population 
which obliges a country to have recourse to land of a worse 
quality, to enable it to raise its supply of food, rent on the 
more fertile land will rise. 

"Thus, suppose land Nos. i, 2, 3, to yield, with an equal 
employment of capital and labor, a net produce of a hun- 
dred, ninety, and eighty quarters of corn. In a new country, 
where there is an abundance of fertile land compared with 
the population, and where, therefore, it is only necessary to 
cultivate No. i, the whole net produce will belong to the 
cultivator, and will be the profits of the stock which he ad- 
vances. As soon as the population had so far increased as 
to make it necessary to cultivate No. 2, from which ninety 
quarters only can be obtained after supporting the laborers, 
rent would commence on No. i ; for either there must be 
two rates of profit for agricultural capital, or ten quarters 
must be withdrawn from the produce of No. i, for some 
other purpose. Whether the proprietor of the land or some 
other person cultivates No. i, these ten quarters would 
equally constitute rent : for the cultivator of No. 2 would get 
the same result from his capital, whether he cultivated No. i 
paying ten quarters for rent, or continued to cultivate No. 2 
paying no rent. In the same manner it might be shown, that, 
when No. 3 is brought into cultivation, the rent of No. 2 
must be ten quarters or the value of ten quarters, whilst the 



RENT, 189 

rent of No. i would rise to twenty quarters ; for the cultiva- 
tor of No. 3 would have the same profit, whether he paid 
twenty quarters for the rent of No. i, ten quarters for the 
rent of No. 2, or cultivated No. 3 free of rent." 

5. If this doctrine be true, then there must follow from 
it certain very important consequences. Prominent among 
these would be that of the increasing ratio of rent to labor. 
As population increases, it is compelled to occupy always 
the inferior soils, so long as they can be found of sufficient 
fertihty to yield a bare subsistence to the cultivator. It must 
thus follow that rent, or the proportion of the product going 
to the owner of the land, is always increasing ; while that of 
the laborer is always diminishing as population increases. 
This, of course, is diametrically opposed to the doctrine here- 
tofore developed, that, in an advancing community, labor is 
always receiving in increasing proportion of the joint prod- 
uct of labor and capital. 

6. It is said that the increase of wealth, and the improve- 
ments in the methods and instruments of production, retard 
the operation of the law. But this improvement, which is 
implied in the progress of civilization, is but a part of the 
general law. It is in the very nature of things, that up to a 
certain limit, as men increase in number, there is a more than 
proportional increase in their power over nature.' By com- 
bination, a dozen men can often produce more than a hun- 
dred working separately. Association also tends to put each 
individual in possession of many of the advantages acquired 
by all the others. It increases the possibiUties, the efficiency, 
and the scope of education. All these results of increase 
of numbers cause multiplied discoveries of new forces of na- 

I Analogy would teach us, that it is a part of the more general law, that as this 
limit is approached, the increase of population diminishes, and, when it is reached, the 
increase ceases. 



IQO 



POLITICAL ECONOMY. 



ture, and lead to their manifold application in the industries, 
till production is enhanced incalculably. 

7. If the Ricardo theory be correct, we ought to find each 
generation of laborers worse fed, housed, and clad than their 
predecessors. Mr. E. P. Smith ^ gives in tabulated form an 
illustration of the operation of the supposed law. We have 
space only for results. But suppose a moderately populated 
territory, with a given amount of produce, and allowing a cer- 
tain natural and uniform rate of increase of population : it 
would be found at the end of a specified time, say two hun- 
dred years, that the " population would have multiplied two 
hundred and fifty-six times, food but eighty times ; so that, 
upon equal partition, each person would obtain a little less 
than one- third as much food as his ancestors enjoyed two 
centuries before. The community, to procure the same 
average quantity of food as its progenitors, would require 
three times as much land in proportion to its numbers, and 
thus, in the same degree, be dispersed over greater spaces, 
and placed at greater distances from each other." 

That the facts concerning population and sustenance are 
altogether the reverse of this, has been illustrated in two or 
three different ways. The population of every civilized na- 
tion has greatly increased within the last five hundred years. 
The number of the tillers of the soil has also increased. But 
in neither case has the increase been so great as that of the 
produce. The following figures from the tables of M. De 
Jonnes of the statistical bureau of France, tell the same story 
that is repeated in so many other ways : — 

* Manual of Political Economy, pp. 54-56. 



RENT. 



191 





Total 
Population. 


Agricultural 
Population. 


Paid to 

Agricultural 

Laborers. 


Total Product. 


Balance for 

Remainder of 

Population. 


1700 
1840 


19,500,000 
36,000,000 


15,000,000 
27,000,000 


Francs. 
458,000,000 
3,016,000,000 


Francs. 
1,308,000,000 
5,025,000,000 


Francs: 
859,000,000 
2,000,000,000 



It will be seen, that, though between the two dates given 
the population had not doubled, the produce had nearly 
quadrupled ; and, though the agricultural population had in- 
creased less than a hundred per cent, they had six times 
as much as before, while the remainder of the population 
had a little more than twice as much.^ 

8. The grand fallacy in this theory, as claimed by Mr. 
Carey, lies in the assumption that men select at first, for agri- 
cultural purposes, the richest and most productive land. 
This assumption is not unnatural ; and yet, as matter of fact, 
it appears to be incorrect. It is doubtless true that a person 
of ordinary judgment, having reference only to immediate 
returns, and having the choice of two tracts of land equally 
advantageous in situation, but of which, with the same out- 
lay, one would yield twenty bushels to the acre, and the other 
only ten, would choose the former. Other things being 
equal, men would select for cultivation those lands which 
would yield the largest returns to a given amount of labor. 
Yet Mr. Carey has shown, by examples from almost every part 
of the habitable world, that the most productive lands are 
very seldom those first selected for cultivation. The range 
of instances is so extensive, and the variety of circumstances 
so great, while the fact is so uniform, of the non- occupation 
of the richer soils before an advanced stage of civilization is 

1 E. P. Smith's Manual, p. 98. 



192 POLITICAL ECONOMY. 

reached, and the population greatly multiplied, that the argu- 
ment is of very great weight. 

Nor is this at all unaccountable. There is a satisfactory 
and easily apprehensible reason for it. The richest and 
most productive soils are almost invariably those most diffi- 
cult of cultivation. When a new country begins to be settled, 
the population is usually small and much scattered : men 
cannot easily combine, and their capital is scanty. They are 
compelled to select the thinner soils, for the reason that they 
are the more easily cultivated. To go into the thick forests, 
where the soil is rich and heavy, and the large trees are 
densely crowded together, would be impossible ; as, before 
such land could be rendered productive, the people might 
perish with hunger. Taking up such soils as they are able 
to subdue with the means at their disposal, obtaining from 
these enough to support life and something more, they may 
gradually invade the heavier soils. As the number increases, 
they apply themselves to the still richer lands, and always 
with proportionally greater returns ; till, capital increasing and 
means multiplying, they are able to enter upon and subdue 
the most productive portions of the territory to which they 
have access. But this is not a rapid process. Up to this 
present time, in all civilized nations some of the most pro- 
ductive lands are not yet occupied. The largest returns to 
a given amount of labor even now in England are from lands 
which have been brought fully under cultivation far within 
the present century. 

9. It would seem to follow from this latter theory, that 
the value of land arises not from the fact that all additions 
to the population after a certain time must resort to a less 
productive soil, but from the same facts which constitute a 
condition of all other value ; namely, the labor bestowed upon 
the commodity. It is also highly probable that the same 



RENT. 



193 



general law is operative here as in relation to wages and 
interest. The laborer is always receiving both a larger pro- 
portion and a larger quantity of the joint product of labor 
and capital ; while the capitalist, though receiving a larger 
quantity, gets only a smaller proportion. It is, then, obvious 
that, as a real civilization is developed, the tendency is 
always to equality among men. This may be retarded by 
the application of false principles and by bad legislation. 
But the great economical laws remain the same, and, if not 
violated, will work out beneficent results. 

10. Rent — or what, for our purpose, may be considered 
the same thing, the value of land — is influenced by several 
considerations. 

1. The fertility of the soil is an important element. One 
would be willing to pay a higher price for land, that, with a 
given outlay, would yield the larger returns, other things 
being equal. But this consideration will be materially modi- 
fied by those which follow. 

2. The facility or difficulty of cultivation makes a second 
condition. If, other things being equal, a certain tract will 
require the labor of four men, and will produce only fifty per 
cent more than another, which can be carried on by two men, 
the latter will be the more valuable. Yet this is also subject 
to modification. Here is a piece of land of exceedingly 
rich soil, but covered with very heavy timber, or requiring 
drainage ; in either case involving great expenditure. The 
dry prairie in the neighborhood needs but litde labor to 
render it largely productive. Five times the amount of ex- 
penditure which is bestowed on the latter might not, though 
repeated for two years, render the former directly capable 
of equal returns j but afterwards, and for all time to come, 
it may yield three or four times as much, to the same amount 
of labor, as the other. It is evident that the land which is 



194 POLITICAL ECONOMY. 

at first capable of the less profitable returns, might be the 
more valuable. 

3. The third consideration is that of situation. The value 
of land depends principally on the value of its products ; 
and the cost of bringing the latter to market is an important 
element in estimating this value. Land near a city or large 
town may be worth two hundred dollars an acre ; while pre- 
cisely the same quality of land, one hundred miles distant, 
and with no means of transportation except by common 
roads, may be worth no more than five or ten dollars. There 
are also other modifying elements. The more ready the 
access to the market, the more largely can all the capabilities 
of the soil be utilized. In the vicinity of great cities, a large 
amount of marketable produce can be raised at an immense 
profit, which it would pay nothing to cultivate at any con- 
siderable distance. Then, too, the nearer the land is to a 
densely populated town, the greater the facility of fertiliza- 
tion. We have seen how universal is the tendency to dete- 
rioration in land in a purely agricultural region. It needs 
to be in such relation to a large market-town, that a large 
proportion of what is produced on the farm can also be 
consumed on it, or that the equivalent of what is produced 
can be returned. Sometimes the capabilities of the soil are 
thus increased three, five, or even ten fold. 



CHAPTER XI. 

SOCIALISM. 

1. This is one of the proposed remedies for what is evil 
in the present industrial situation. It is advocated by a 
considerable number of agitators and of reputable thinkers. 
The name " Socialism " has been associated in the minds 
of many in our communities with revolution, and the utter 
overthrow of existing institutions, and especially with the 
despoiling of the rich and the distribution oi their accumu- 
lations. Many do not discriminate between it and Anar- 
chism, with which it has no necessary affiliation. It has 
been unfortunate in the character of many of its advocates, 
— extreme men with extravagant and radically wrong no- 
tions of the real evils they seek to remedy. Recentl}^, 
however, a different class of men have become prominent 
in its advocacy, and, as a consequence, more moderate 
views have prevailed, and the movement has been relieved 
of its more offensive features. 

2. As may be inferred from the foregoing statements, 
there are several phases or forms of what goes by the gen- 
eral name of Socialism. For this reason it is not easy to 
define it. In a general way it may be described as a policy 
under which the government assumes the function of sole 
employer of labor, and manager of all industrial enter- 
prises of every sort. To this end it must become the 

195 



196 POLITICAL ECONOMY. 

owner of all capital, and private property as capital is 
abolished. It does not aim to destroy all personal prop- 
erty, only such property must not be used as capital. 
Every person of suitable age is to be required to contrib- 
ute to the production of wealth according to his ability, 
and every person is guaranteed an adequate support. 
Under such a system there would be no paupers and no 
persons of great wealth. 

3. The great aim of Socialism is to remedy the evils of 
the present capital and wages system of industrial produc- 
tion and distribution. These evils are very likely to be 
exaggerated, even by the more candid and conservative 
advocates of the scheme. It is unquestionable that evils 
of a grave character do exist, and it is the business of wise 
economists to ascertain a remedy for them. That enor- 
mous fortunes are acquired sometimes, it is true, where the 
possessors of them have rendered to the community a full, 
and often more than a full, equivalent for them, but often 
where the possessors have put forth no effort, or.indicated 
any ability proportioned to the result, and adding nothing 
to the real wealth of the community ; that there are large 
numbers who live on the income from inherited wealth in- 
vested as capital, and who in no sense contribute anything 
to the common weal ; that thousands are poorer because 
these are richer; that by the system of industry largely 
operated by corporations the laborer for wages is often 
subjected to irregular and interrupted employment, and 
to involuntary and enforced idleness a portion of the time ; 
and that the excessive competition now prevailing involves 
a vast waste of productive power, and thus a vast loss of 
product, — these are evils too palpable to be disputed. 
All this may be granted without at all accepting the decla- 
rations often made, that the wage system is one of abso- 



SOCIALISM, 197 

lute slavery ; or that the rich are growing richer and fewer, 
and the poor, poorer and more numerous ; or that the 
laborer is receiving a constantly decreasing proportion of 
the greatly increasing product of industry, while the cap- 
italist is receiving a constantly increasing share, — none 
of which are true, as has been abundantly proved by care- 
fully prepared statistics. 

4. Socialism aims at a fair and equitable distribution of 
the products of industry among the producers. But what 
would be a fair and equitable distribution ? Socialists 
themselves differ on this point. Shall every person receive 
an equal share of the product with every other person, or 
shall each receive according to his productive ability ? 
Even if the thinkers shall have decided this very important 
questions, is it at all probable that, under the new regime^ 
there will not be violent discontent ? If, on the one hand, 
it shall be the rule that all shall receive alike, will there 
not be wide-spread dissatisfaction among those who pro- 
duce two, three, five, ten, and twenty times as much as cer- 
tain others ? If there is to be discrimination, may there 
not be the same discontent and public protest as now 
against the more favored individuals ? It may be claimed 
that the increase of production would be so great that the 
amount each would receive would be such as to forestall 
discontent, but those who say this have not made very care- 
ful calculations on the subject. Mr. Atkinson has shown 
that an increase of five cents' worth of material comfort 
each day to each inhabitant of the United States would 
require the annual production and equitable distribution 
of more than one billion dollars' worth of additional com- 
modities. It is true that the Socialistic leaders calculate 
that under this system there will be a vastly increased 
production. Undoubtedly, under the harmonious working 



198 POLITICAL ECONOMY. 

of such a system, there would be a vast saving of produc- 
tive forces which are now wasted ; but there are likely also 
to be great losses from causes already alluded to, such as 
the lack of stimulus to extraordinary exertion, which now 
plays so important a part in the productive process. 

5. The ideal society which it is claimed will be the result 
of the adoption of Socialism is a very delightful one. It 
is nothing less than the millennium in which so many Chris- 
tians earnestly believe, and for which they ardently hope, 
— a state in which there will be no want and no poverty, 
no rich men lording it over the poor, no injustice nor op- 
pression nor degradation of any portion of the community, 
no crime and no selfishness, but all men dwelling together 
in harmony, each doing as he would be done by. But this 
appears to me to be a condition precedent to the success of 
the Socialistic system, not one to be created by it. It is 
not a state into which we can vote ourselves. Society 
must cultivate towards it, and grow up to it. Here would 
seem to be the great fallacy of Socialism. It assumes a 
condition of human nature as universal, which is found as 
yet only in small minorities. 

6. If anything is better settled than anything else re- 
specting human character, it is that men will not work 
except under the stimulus of self-interest. Emerson says, 
"Men are as lazy as they dare to be." This holds true 
almost universally. Under the present system the fear of 
want, the desire of possession, the power that wealth 
gives, and some other cognate motives, constitute this 
stimulus. In the Socialistic state none such will exist. 
Every man's want's will be provided for in any case. The 
desire for possession and the power conferred by wealth 
will be reduced to a minimum. No penal sanctions in the 
interest of honest labor adequate to the end proposed have 



SOCIALISM. 199 

been set forth in any presentation yet made to tlie public. 
It is not a reasonable reply that in the Socialistic state men 
will be public-spirited, and all will be disposed to work. 
There is obviously nothing in the scheme of Socialism that 
implies such a radical revolution in human nature. 

7. The advocates of Socialism also seem to take no 
adequate account of the natural selfishness of men, of the 
tendency to self-indulgence and the immediate gratifica- 
tion of any desire, impulse, or appetite which may char- 
acterize individuals, and out of which come the larger 
proportion of poverty and wretchedness in our communi- 
ties. These are as likely to exist under the socialistic 
system as under the present. Let us take an instance. 
As before intimated. Socialists differ as to the principle 
of distribution of the products of industry, some claiming 
that all should share alike, others that the distribution should 
be in proportion to the productive power of individuals. 
Let us suppose the former. There is also a difference as 
to method. Perhaps the most plausible is that each per- 
son shall receive a card entitling him to a certain aggre- 
gate amount for a given time. He carries it to the gov- 
ernment storehouses, and takes what he wants of any kind, 
and the amount and value is checked off on his card. He 
may take this from time to time, as he may need, and in 
any form, — provisions, clothing, furniture, books, pic- 
tures, jewelry, silks, laces, tobacco, whiskey, etc. What 
is there to hinder a man who is so disposed from doing as 
so many do now, — take a disproportionate amount, or the 
whole, of his apportionment in articles of mere show and 
no use, or which minister to his appetites, and degrade 
and ruin his character, and bring distress upon his family? 
How are poverty and want to be prevented under such 
conditions ? 



200 POLITICAL ECONOMY. 

8. Socialism, then, though not the raw-head and bloody- 
bones spectre that it is sometimes pictured, is, in the pres- 
ent condition of humanity, impracticable. It may easily 
be said that the evils alluded to, and many others of which 
no mention is made, are not certain to exist under Social- 
ism. Still, they are possible, and to enter upon a wholly 
artificial system, with no guarantee against them, would, 
even in a limited experiment, be imprudent, and on the uni- 
versal scale proposed might be a crime. It is not unlikely 
that in the progress of civilization we may gradually come 
to a system embracing some of the prominent features of 
Socialism. Already we have a considerable number of 
instances in which the government has assumed the con- 
trol of great business enterprises. Our great postal sys- 
tem is purely Socialistic. So is our lighthouse system. 
Many governments operate the telegraph system. The 
common roads are generally the property and care of the 
government, general or local. Other kinds of business 
are carried on by government to a greater or less extent. 
There are still others which, though not recognized as prop- 
erly Socialistic, at least partake somewhat of that nature. 
Such are the water-supply of cities, public education, the 
gas and electric lighting systems. Government might per- 
haps safely extend its proprietorship to other kinds of in- 
dustrial undertakings, but there is a point beyond which, 
in the present condition of human society, it would not be 
safe to go. What may be the case when society is more 
highly developed and improved, it is yet too early to 
determine. 



CHAPTER XII. 



TAXATION. 



1. One of the indispensable conditions of a prosperous 
community is the maintenance of order and justice between 
the members of the body pohtic. There must be protection 
against criminally disposed persons, and against all sorts of 
fraud and violence. The weak and poor and ignorant must 
not be allowed to be put at a 'disadvantage in contests with 
the strong and rich and intelligent ; and there must be some 
way to decide questions of law and equity. Now, order 
cannot be maintained by each man's undertaking to execute 
justice for himself. It must be done by society in its cor- 
porate capacity. But in order to this, on the principle of 
the division of labor, as well as on other grounds, the duty 
is delegated to an agency or set of agents appointed for this 
purpose. This agency is the Government, and consists of a 
number of men acting in a variety of capacities. 

2. Now, if these functionaries are a condition of any 
considerable production, then, clearly, a share of the wealth 
created belongs to them under the law of distribution. This 
is to be contributed by all who share in the benefit of the 
agency. The aggregate constitutes what is called the reve- 
nue of the Government. Its apportionment among the mem- 
bers of the community is known under the general name of 
taxatio?i. 



202 POLITICAL ECONOMY. 

The most equable method of levying the taxes is a subject 
upon which a vast variety of opinions exists ; and, though 
great improvements have been made in the devices employed, 
they are still very imperfect, and public men are far from 
agreement in regard to them. 

3. It is a question of some importance, whether a man 
should be taxed according to the amount of his accumula- 
tions, or of his revenues. A man may have a large estate 
in land or other property, which, owing to various circum- 
stances, is bringing him in very little or even no revenue. 
Another has no property at all, but he has a large income 
from his profession or occupation. If these both pay ac- 
cording to property, the latter will contribute nothing, while 
the former will be heavily taxed. If they pay according to 
revenue, the latter will pay largely, and the former contribute 
nothing. Again, there are some so situated that they will 
have 2i perpetual iTioAQXSitQ. income ; while others have a much 
larger income, which, however, depends upon the continu- 
ance of health, business prosperity, or some other contin- 
gency which is wholly uncertain. If the tax is simply 
according to revenue, and not property, here would be an 
instance of great inequality. 

4. Another question arises here, which is not always 
squarely met by writers on this subject. Does genuine 
economy require a tmiform system of taxation, according to 
either property or income ? The theory of taxation, generally 
accepted, implies the affirmative of the above question. But 
it is doubtful if any civilized government ever really at- 
tempts to apply it. The economical instincts of men lead 
them to repudiate it in practice. Unquestionably, what men 
desire in respect to taxation is a system which will give the 
needed public revenue, at the least possible expense on the 
whole, and with a just distribution of the burden. But it 



TAXATION. 203 

is clearly possible, that, by attempting a literal and arith- 
metical apportionment, many persons may be reduced to 
poverty, and others to pauperism ; so that some who would 
otherwise help to bear the burden are prevented from doing 
so, and others are made to add to it. It is on this account 
that nearly all civilized nations make certain exemptions of 
the property of the poor from taxation, — certain articles 
of prime necessity about the house, certain tools used on 
the farm or in the trades, certain domestic animals, and 
other property of a similar kind. This is not done from 
mere benevolence, but simply as a measure of economy. 
It is true that these items are exempt in the case of the rich 
as well as of the poor man ; but, obviously, the substantial 
advantage accrues to the latter, as it was intended to do. 
They comprise but a small fraction of the wealth of the 
former ; but they are sometimes the whole, and often the 
chief part, of the poor man's goods. By such exemption, 
thousands are encouraged, and prevented from losing hope 
and self-respect and independence, who otherwise might 
become a burden to society, thus involving an expense far 
greater than the amount of the small tax they would pay if 
there were no exemption. 

There is another custom, nearly universal, which is not in 
harmony with the principle of uniform taxation. It is that 
which prevails in most modern nations, of taxing such kinds 
of business and such products as are admitted to be perni- 
cious in their effects on society, at a higher rate than other 
kinds of business and products : spirituous liquors and to- 
bacco come into this category. The reasonableness of this 
policy is obvious. If the tax is so heavy as to discourage or 
diminish the use of these articles, no person really suffers : 
on the contrary, it is scarcely disputed by any candid man, 
that great benefits would ensue. If diminished productive- 



^ 



204 POLITICAL ECONOMY. 

ness, if pauperism and crime, come from the use of these 
articles, then is the community richer from any cause tend- 
ing to lessen the consumption. If a larger proportional tax 
will do this, it will both increase the revenue and diminish 
the burden. 

A similar discrimination is frequently made in respect to 
what are called luxuries. If a heavy tax should be put upon 
the rich man's costly clothes, jewellery, carriages, and expen- 
sive furniture, he would not greatly suffer if he should buy 
somewhat less of them. But if the poor man's bread and 
meat and the implements of his daily toil are taxed, he can- 
not forego the expense of them without serious damage. 

There is still another discrimination which civihzed nations 
usually make. All property devoted to the public good, and 
which is used for purposes tending to diminish the evils 
which occasion a large proportion of the expenses of the 
government, is exempted. Such especially are churches and 
schools, and charitable and benevolent institutions. This 
exemption, also, is prompted by a wise economy. It renders 
the burdens of taxation lighter instead of heavier, and min- 
isters largely to an increase, instead of a decrease, of public 
wealth. 

5. Taxes are divided into direct and indirect. Direct taxa- 
tion is when the tax is paid by the person upon whom it is 
levied. In indirect taxation the tax is levied on one person, 
but really paid by another. Taxes upon real estate, tools, 
machinery, domestic animals, etc., are direct taxes. They 
are supposed to be paid by the owner of the property taxed. 
Yet even here the tax is sometimes really paid by another 
party than the real owner. 

Indirect taxes are levied on commodities ; and the amount 
of the tax is added to the price of the commodity, and thus 
paid by the consumer. For instance, under the internal rev- 



TAX A TION. 



205 



enue system adopted during the civil war, there was a stamp- 
tax of one cent on every bunch of matches. The consumers 
paid a cent more for each bunch of matches than they other- 
wise would. The same is true of duties under a revenue 
tariff. If there be a duty of ten cents a pound on coffee, 
though nominally paid by the importer, it is added to the 
price of the article, and thus finally comes from the consumer. 

6. There is some difference of opmion as to the compara- 
tive merits of direct and indirect taxation. It has been 
claimed in favor of the latter, ( i ) that it is imperceptible, and 
thus avoids exciting dissatisfaction in the payers j (2) that it 
is paid by each according to consumption, and that therefore 
those who consume less of the taxed article pay less of the 
tax; and (3) that it is divided into such minute portions as 
to make the payment easier. 

It is true that the payment of the tax on commodities is 
not generally realized with much distinctness. It is regarded 
as a part of the price of the article, and is set down in the 
account of expenses as such. It is also true that the payment 
of the tax in minute portions prevents the conception of its 
real amount. Still the aggregate of all the items is none 
the less a burden because it is distributed over much time, 
and it is just as actually a subtraction from the wealth of the 
individual. 

But these very facts are among the real and grave objec- 
tions to the method. Indirect taxation is easier for the 
government, and less obnoxious to the people. On this 
account the government is less likely to be frugal and eco- 
nomical than if the revenues disbursed came more reluctantly 
from more conscious contributors. Where the people are 
taxed directly, they know the full amount of the cost of the 
government to them. Under such circumstances, they are 
far more likely to scrutinize the acts of their agents, and hold 



206 POLITICAL ECONOMY. 

them to a strict account. It would make a great difference 
in the conduct of public affairs if every man knew just how 
much of the aggregate cost he had to pay. 

It is also to be said concerning this method, that it is far 
more likely to be unequal than direct taxation. The duties 
imposed, whether excises or customs, will be paid by the con- 
sumer in proportion to the amount consumed. But if they 
be levied upon the necessaries of life, or even its common 
conveniences, the poor man must pay nearly as much as the 
rich. It is very easily said, that each pays in proportion 
to his consumption, and that he may diminish his tax by 
diminishing his consumption. But is it fair to compel one 
to the alternative of abstinence from the ordinary comforts 
of life, or the payment of several times his proportion towards 
the support of the government? Is it the part of a wise 
economy ? 

Any system of taxation is vicious in which a large pro- 
portion of the revenue is raised by taxes on the necessaries 
and common conveniences of life which are consumed by 
the poor to the same extent as by the rich. It is not only 
unjust, but every way reprehensible, that the former should 
bear the larger part of the burden of the support of the 
government while the latter are permitted to go compara- 
tively free. It is true that there are apparent taxes which 
are not so in reality, as where there are duties levied on 
foreign commodities the importation of which is insuffi- 
cient to come appreciably in conflict with the large domes- 
tic product. But there are instances enough where the 
tax is not only apparent but real, and where it falls with 
undue and unjust weight upon the consumer of moderate 
ability. Such a system of taxation is open to a demand 
for reform. 

7. There are several forms of direct taxation. The fol- 



TAX A TION. 207 

lowing are the principal : i. The income-tax. Abstractly this 
is the fairest and most equable of all the forms of raising 
a revenue. Under this method, equality of taxation, so far 
as that is desirable, v/ould be more closely approximated than 
under any other. Still, it is not popular, and in recent times 
governments rarely resort to it. That a method so fair and 
jnst should be so unpopular and so little used, is singular. 
Probably it is partly for the same reason that indirect is 
preferred to direct taxation. People would rather pay their 
taxes without knowing it. It is also objectionable by reason 
of its inquisitorial character. Business- men do not like to 
have their affairs examined by public officers. There is 
much opportunity for fraud ; and thus, while dishonest men 
escape the payment of a large proportion of what is justly 
due from them, men of integrity have to pay more than their 
share. The situation of two persons having the same income 
is often so different, that the tax may be far more burden- 
some to one than to the other. These and some other rea- 
sons render the method unpopular. 

2. The second method of direct taxation is that of assess- 
ing the whole property, real and personal, according to its 
estimated value. This, with some exceptions soon to be 
noted, is, if fairly carried out, the most equable of any save 
that of the income-tax. It is generally according to one's 
ability ; and, though one's revenues are not always propor- 
tional to one's property, there are often some partial com- 
pensations for this. Still, evidently there can be no absolute 
equality. 

The exceptions referred to are as follows : First, there are 
the exemptions mentioned in section 4 : these are recog- 
nized by all really enhghtened states, and do not need to be 
further discussed. Secondly, all property devoted to the 
public use, and from which the holders receive no revenue : 
this principle, too, has been examined, and the reasons in 



208 POLITICAL ECONOMY. 

its favor set forth ; it appears to be a principle of sound 
economy on the whole, and one diminishing, instead of in- 
creasing, the burden of taxation. 

There is, however, much difficulty in adjusting this method, 
mainly because a considerable portion of the wealth of a 
community exists in invisible and intangible forms, and can 
thus be easily concealed. Property is also liable to double 
taxation, as in the case of mortgages. In some of the States, 
the mortgagor is required to pay the tax on the whole prop- 
erty ; while at the same time the mortgagee is taxed for the 
portion mortgaged. This is manifestly unjust. 

But, aside from this, there are great difficulties in ascer- 
taining all the personal property ; and, unless some method 
can be devised for doing this, every attempt to tax all prop- 
erty will be nugatory. According to the best information 
available, it appears, that, in the State of New York, only 
about fifteen per cent of the actual value of the personal 
property is returned by the assessors, and taxed. The same 
is probably true in some other States. 

8. For these reasons, it has been advised by eminent 
writers, that a system of taxation, based wholly on expend- 
iture, should be substituted for all those based on property. 
This need not be calculated by any detailed or itemized esti- 
mate, but as indicated by a single item ; namely, that of rent. 
It is averred, that there is no surer index of a man's pecuniary 
ability than that found in this item of his expenditures. In 
the case of those who live in houses of their own, the rent 
of the house is to be estimated by that of other similar resi- 
dences. This would leave untaxed all personal property, 
except that of certain corporations whose property-value it 
is easy to determine. 

Probably this plan, hke many others, would be found 
greatly faulty ; and it is doubtful if any system can be de- 
vised which will commend itself as very nearly equable. 



TAX A TION. 209 

9. The Single Tax Theory. — Within a few years our 
communities have had their attention called to the specu- 
lations of Henry George. He is a writer of very attrac- 
tive, popular style, and has many just and valuable notions. 
His great leading doctrine is that private property in land 
should be abolished, and that all real estate should be 
owned by society, and disposed of by the government as 
would be for the best interest of the community. He 
would bring this about by a very simple process, — the 
government should impose a tax upon all land-owners equal 
to the proper rental of the land. This, of course, would 
render all land commercially valueless, as no one would 
think of paying anything for land the annual income from 
which is taken by the government. This is to be in the 
place of all other taxes, local, state, and national, direct 
taxes on property, internal revenue taxes, and taxes on 
imports. Hence it is called the " single tax." 

It is not simply as an improved system of taxation that 
Mr. George advocates his theory. He claims that there 
are great and crying abuses which grow out of the private 
ownership of land, and the system of rent. Indeed, he 
traces substantially all the evils of the present industrial 
situation to this source. But among many exaggerated 
conceptions and pessimistic notions, he has some views 
that are, at least, entitled to consideration. One of these 
is that which has been discussed by previous writers under 
the title of " the unearned increment," or the increased 
value of land which comes from no outlay of the owner. 
For instance, in a young and growing city a man buys an 
acre of land for two hundred dollars. He does not culti- 
vate it, nor build on it, nor put upon it any kind of labor. 
He simply holds it for five or ten years, and at the end of 
that time sells it for forty thousand dollars. That is, its 



2IO POLITICAL ECONOMY. 

value has increased two hundred fold, — an increase of 
wealth no part of which has been created by the owner. 
But this increase has not come without some labor applied 
in some relation to the land. This outlay has been made 
by the community as a whole. They have built warehouses, 
stores, churches, schoolhouses, and other public buildings 
and factories, laid out streets ; and it is these which have 
given value to the land. As it is the work, not of the 
owner, but of the whole community, it is very plausibly 
claimed that this increment should go to the community, 
and not to the private owner. But this, even if a correct 
doctrine, should be brought about by some other method 
than that of abolishing private property in land. 

We have space for only two or three objections to this 
theory. In the first place, it implies a confiscation of all 
the property now invested in land. When the government 
assumes the right to lay on all land a tax equivalent to its 
proper rental, property in land virtually ceases, and the 
man who has, by the savings of years, come into posses- 
sion of a parcel of ground, finds himself compelled to pay 
rent to its full value, as if the land belonged to another 
person. Whatever might be right or wrong, wise or un- 
wise, respecting the public ownership of land before it had 
been privately appropriated, the people of our communi- 
ties generally are not likely to consent to so wide-sweeping 
a confiscation. 

In the second place, it is to be noted that this assump- 
tion of ownership by the state is only of the land in its 
original estate. All buildings and structures of every 
kind, and all improvements, are to be regarded as the 
private property of the person who has produced or pur- 
chased them. Now, there are two things to be considered 
here. First, how to discriminate between the land and 



TAXATION. 211 

the improvements ; second, the value of the land aside 
from the improvements, and consequently the value of its 
rental. 

We are to have in view that improvements comprise not 
only all movable structures, like buildings and fences, 
but also all systems of drainage, all removals of stones, 
trees, stumps, and other obstructions; moreover, of all 
additions of fertilizing power to the soil, which a good 
husbandman knows how to make. For instance, here are 
two parcels of land whose natural capability of production 
is precisely the same. Two men enter into possession 
respectively. One is sagacious, shrewd, and enterprising, 
and knows how to use his land to the best advantage ; the 
other is an inefficient and thriftless cultivator. At the 
end of ten years the one farm will yield twenty-five bushels 
of wheat to the acre, and the other ten, and other products 
in proportion. Shall the government apply the Ricardian 
theory of rent to these two parcels of land, and tax the 
former two and a half times as much as the latter ? If so, 
great injustice is obviously done. The simple fact is, land 
by itself, or apart from what is done on it or in some rela- 
tion to it, has very little value — possibly none at all — and 
the rental by itself would be a very minute sum. 

If this be the case, the question arises. How is the gov- 
ernment to secure sufficient revenue for its purposes ? Mr. 
George is clearly of the opinion that an abundant revenue 
will be secured in this way, not only for the present needs 
of the government, but beyond this, for what may be called 
public luxuries, such as libraries, art galleries, baths, and 
means of diversion and recreation. But if the idea of 
simple land value is alluded to, it would seem that the 
single tax would fall far short of meeting the ordinary 
public expenditure. 



